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Financial Markets: Headlines for October 17

October 17, 2011

EQ The S&P 500 gained 1.7% on Friday to bring the week’s gain to 6.0% and the level (1224.58) to the highest since August 3; the Dow gained 166pts to 11644.5 and moved into positive territory on the year (+0.6%); the consensus-beating US retail sales figures added to evidence that the US economy continues to expand; Citigroup’s “economic surprise” index entered positive territory for the first time since April; Google’s earnings helped to boosted sentiment as well, while Eurozone crisis discussion got underway among the G20; the Vix volatility index fell to the lowest level since 3Aug; Stoxx 600 rose 0.8% and posted a 3rd straight weekly gain (+2.8%); bank shares (-0.3%) were under pressure from the Fitch credit rating actions and ongoing uncertainty about haircuts/restructuring of sovereign debt and the need for bank recapitalization

FI The US yield curve steepened further over the week and the 2/30s at 297bps were the widest since 20Sep; the yield on the 10yr benchmark rose 7bps to 2.25% on Friday, the highest close since 29Aug; in the European session, French government debt came under sharp pressure in the wake of Fitch’s rating announcements on banks; the French 10yr yield jumped 17bps to 3.114%; the German 10yr yield rose 9bps to 2.195%; the Spanish 10yr yield closed up 4bps at 5.209%, the highest since 22Sep

FX The euro rose 0.7% versus the dollar to 1.388 and traded at the highest levels in a month amid seeming optimism that European leaders are making progress on a comprehensive plan to backstop their banks and halt contagion; EUR/GBP gained 0.4% to 0.8775, up 1.9% on the week; the yen fell across the board versus major currencies on Friday and over the week, down the sharpest versus AUD, NZD and NOK

G20 Finance ministers and central bankers said the global economy faces “heightened tensions and significant downside risks…that need to be addressed decisively to restore confidence, financial stability and growth”; they expressed high level support (but no details) on the discussions underway in Europe on a comprehensive plan that, as part, would “maximize the impact of the EFSF”; the G20 “will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks”; called on IMF to develop specific proposals on how short term liquidity could be provided to countries facing shocks – to be presented at Cannes summit Nov. 3-4; they “reiterated that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability”

EM The FT reported on Friday that "emerging market countries are working on ways to contribute money rapidly to expand the effective firepower of the IMF, with the aim of increasing its role in combating the Eurozone sovereign debt crisis"

$ US Tsy Secretary Geithner did not express support for boosting the lending capacity of the IMF; “they have very substantial resources that are uncommitted”

$ US Treasury has delayed until later this year the publication of the semiannual report to Congress about foreign exchange policies

€ Reports continued to circulate that Eurozone leaders will ask banks to accept losses of up to 50% on their Greek bond holdings; French FinMin Baroin said it is “more or less certain” that the loss will be greater than the 21% currently agreed

€ German FinMin Schaeuble: “A lasting solution for Greece is not possible without a debt write-down, and this will likely have to be higher than that considered in the summer"; he is confident that decisions made at the upcoming EU summit will convince investors; the IMF has enough means to meet its commitments; if necessary states could help boost bank capital but banks should be given some time to acquire it

€ EC President Barroso said that any decisions at the upcoming Eurozone leaders’ summit (Oct.23) “should be enforced immediately, concerning the strengthening of the EFSF or concerning increased guarantees for our banks”

€ Italian PM Berlusconi’s centre-right government won the confidence vote in the lower house of parliament in a vote of 316 to 301

€ S&P cut Spain’s credit rating late on Thursday by 1 notch to AA- and said the outlook is negative

€ ECB President Trichet: "The ECB has done all it could to be up to its responsibilities in exceptional circumstances. The ultimate backstop is, of course, the governments”; governments should be held to their responsibilities

£ UK BoE Deputy Governor Bean: "If we need to undertake further asset purchases, then we will do so"; it is possible that the UK Chancellor could decide that UK banks should participate in Europe’s recapitalization plan

£ UK BoE MPC member Posen published a research paper on inflation: "We found no evidence to suggest that the Bank of England’s inflation target compelled it to fight inflation any more aggressively than the Fed”; evidence suggests “that overshooting the [BoE’s 2%] target has not damaged the central banks’ credibility”

$ US retail sales jumped 1.1%MoM in September and the August figure was revised up +0.3% from a flat pace reported originally; the result surprised versus the consensus forecast of +0.7%; sales rose in 10 of the 13 major categories – motor vehicles & parts +3.6%; gasoline stations +1.2%; clothing +1.3%; the 3-month annualized pace of sales excluding autos, gas, and building materials dealers increased to a 3m high of 4.8%

$ US UMich consumer confidence remained extremely depressed and fell in the preliminary October estimate to 57.5 from 59.4, disappointing versus the median call for a small increase to 60.2; the 3m average fell to the lowest level since June 1980; the index measuring expectations for the next year fell to a new cycle low of 47.0 and was the weakest since May 1980; current conditions index weakened 1.1pts to 73.8, below 6m average of 76.2; inflation expectations weakened and the 5yr measure fell to 2.7% for the first time since Sep’10

€ The final Eurozone September CPI was confirmed at 3.0%YoY, up from 2.5% in August at the highest level since Oct’08; the core CPI bounced to 1.6%, above consensus of 1.5%YoY, after stabilizing at 1.2% in August; clothing prices jumped after the summer holidays and were up 2.0%YoY vs. -2.8% in August

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