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Financial Markets: Headlines for October 26

October 26, 2011

EQ The S&P 500 fell on Tuesday after 3 sessions of gains and extended losses in the last hour of trading to end down 2.0% at 1229.05; declines were broad-based led by financials (-3.1%) and basic materials (-2.8%); earnings reports were mixed and major US economic figures including consumer confidence disappointed versus consensus forecasts on Tuesday, while policy uncertainty stemming from Europe remained high; the Eurozone finance ministers cancelled a rendezvous scheduled for today, reportedly because full technical details of new crisis measures have not been worked out or agreed – national leaders will still meet tonight for their summit; the Euro Stoxx 50 index lost 1.1% to 2343.96

FI USTs rose sharply on the news that the Eurozone finance ministers’ meeting was cancelled (although the leaders’ summit will still take place) and extended gains after the disappointing US consumer confidence report and strong 2yr note auction; the yield on the 10yr fell 12bps to 2.109% on Tuesday and the curve flattened with the 30yr yield down 14bps to 3.130%; in the European session French bonds rallied (10yr: -13bps to 3.166%) and outperformed Bunds (-6bps to 2.056%); Italian and Spanish 10yr bonds stabilized ahead of the summit; the Greek 2yr yield climbed to a new record high above 75%

FX Moves on the day in forex were limited ahead of the Eurozone leaders’ summit but the Dec’11 gold future jumped 2.8% to $1700.4oz, at the highest levels since 23Sep; EUR/USD finished the US session little changed and slightly above 1.39; Cable touched the highest level since 8Sep and advanced 0.1% to 1.600; the yen was up broadly versus major currencies and USD/JPY posted a new post-WWII low of 75.74, then bounced slightly to 76.08 which was still down 1.0% from a week ago

$ The US sold $35bn in 2yr notes at a high yield of 0.281%, the highest since the July auction (0.417%); the bid/cover ratio of 3.64 was above the 10-auction average of 3.32; indirect bidders took 39.2%, the largest share since Oct’10

$ US CB consumer confidence fell 6.6pts in October to 39.8 and disappointed sharply versus the consensus forecast for an increase to 46.0; the expectations measure fell 6.4pts to 48.7 and was the weakest since Mar’09; income expectations were the most pessimistic since Apr’09; the present situation index declined 7.0pts to 26.3; business conditions were judged to have worsened but the index measuring sentiment toward the labor market stabilized at -43.7, in line with the 3m average

$ US Richmond Fed manufacturing PMI held at -6 in October, disappointing versus the consensus forecast for an increase to -1; the PMI remained below the 6-month moving average (-4) and shipments contracted at a faster pace (-6 vs. -2 previously); the new orders balance rose to -5 from -17; the employment balance fell into negative territory at -7 vs. +7 in September and was the lowest since Nov’09

$ US S&P/CS 20-city house prices contracted at a slower pace of 3.8%YoY in August versus -4.2% in July (revised from -4.1%); on a seasonally-adjusted basis, prices fell slightly for a 4th consecutive month

Minimize€ The Eurozone leaders may not present all numeric details related to their decisions today, as negotiations with private sector investors in Greek debt may not be complete; on the EFSF, leaders may approve 2 options for leveraging – an insurance scheme and a Special Investment Vehicle open to outside investors and possibly the IMF – but leaders could leave details to the finance ministers; they may indicate a range of the EFSF’s new firepower; they are likely to outline the size of future public sector support for Greece and perhaps the desired level of Greek debt for 2020; they will reportedly express support for the ECB’s “non-standard measures” (i.e. bond purchases) in the context of exceptional financial market conditions – Reuters

€ German Merkel said German lawmakers are against a provision in the draft EU Summit statement that would express support for the ECB’s “non-standard measures”

€ Eurogroup Chairman Juncker said that leaders need to take decisions that “will answer all questions” and “include the IMF in any European solution to a maximum extent”; he said the private creditors may be asked to take a loss of about 50% on their Greek debt holdings; the EFSF must be strengthened to stop contagion into Italy; the ECB should not be overtaxed in its role

€ Within Spain’s financial sector, the European Banking Authority may only consider the capital needs of 5 large Spanish banks as it draws up plans for bank recapitalization

€ ECB’s Mersch said that the Eurozone needs an institution that is in charge of fiscal issues; greater coordination is needed at a European level

€ ECB’s Bini Smaghi: "It is important to realise that the size of the backstop has to be proportional to the systemic risk we may face. The best way to deal with contagion is to act quickly, with enormous firepower”

€ ECB President Trichet: "Increasingly, it seems that it is not too bold to consider a European finance ministry, but rather too bold not to consider creating such an institution"

€ Spain sold €3.48bn in 3- and 6-month bills but yields were higher than at previous similar auctions; the yield on the 3-month bills was 2.292% vs. 1.692% at the auction on 27Sep

€ German GfK consumer confidence advanced slightly in November to 5.3 from 5.2 in October, but remained on a declining trend, below the 6m moving average for a 7th consecutive month

€ Italian retail sales were flat in August versus -0.1%MoM in July and have not posted an increase since April

£ UK BoE Gov. King said the measures to be introduced in Europe over the next few days will aim “to create a year or possibly two years’ breathing space. The underlying problems still have to be resolved"; he said the MPC came very close to voting for more asset purchases at the September meeting, and when financial market volatility persisted into October they followed through with a QE announcement; he said it’s possible that the BoE could buy assets with proceeds from maturing gilts

£ UK BBA loans for house purchase weakened for the first time since April, at 33.1k in September versus 35.1k in August (originally 35.2k)


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