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Financial Markets: Headlines for October 26

October 27, 2011

€ Eurozone leaders reached an agreement early this morning with the Institute for International Finance to develop a voluntary bond exchange that would increase the nominal discount on notional Greek debt held by private investors to 50%, in order to put Greece’s debt to GDP ratio on a path to reach 120% by 2020; leaders agreed on options that could leverage the resources of the EFSF by 4 or 5 times to yield about €1trn, through a risk insurance scheme for buying bonds in the primary market, and through use of Special Purpose Vehicles that would combine resources from private and public investors; the Eurogroup was called upon to finalise the terms and conditions in November; “further cooperation with the IMF will be sought to further enhance the EFSF resources”; on the banking system they reiterated the message released earlier by the European Banking Authority (EBA); they committed to ensuring fiscal discipline and accelerating structural changes; economic and fiscal coordination and surveillance will be strengthened; governance will be improved; steps will be identified by the end of the year on how to strengthen the economic union

€ The EBA said late Wednesday that EU “banks are required to establish a buffer such that the Core Tier 1 capital ratio reaches 9%…by the end of June 2012”; the preliminary estimate for the needed capital buffer is €106.5bn; the needs of Greek banks (€30bn) are already covered by the existing aid programme; Spanish banks need €26.1bn; Italian €14.8bn; French €8.8bn; Portuguese €7.8bn; and German €5.2bn; plans for reaching targets are due by end-2011; to reach targets, banks are expected to avoid excessive deleveraging and to withhold dividends and bonuses; related to funding guarantees the EBA will work with the EU Commission, ECB, and EIB to develop a “coordinated approach” for setting up public guarantee schemes on term funding

EQ US equities resumed gains on Wednesday although the session was choppy as details and rumours from the EU leaders’ meeting dripped out; during the US session Polish PM Tusk said that leaders had agreed on the need for bank recapitalisation by June 2012 against a core tier 1 capital ratio target of 9%, but other elements were still being worked out, including the private sector’s involvement in the 2nd Greek bailout; the Dow gained 1.4% to 11869.04 and the S&P rose 1.1% to 1242.0; gains were broad-based but retailers were under pressure from disappointing Amazon (AMZN, -12.7%, $198.40) earnings; performance among European bourses was mixed (German Dax: -0.5%; Italian FTSE MIB: +0.1%); Euro Stoxx 50 fell 0.4% to 23353.06 and was down 16.4% YTD

FI USTs declined sharply on the day, although moves in the US session were choppy as investors tracked news out of Europe and the Treasury sold 5yr notes in a well-bid auction; the yield on the US 5yr rose 8bps to 1.064% and the yield on the 10yr benchmark jumped 10bps to 2.205%; in the European session uncertainty about the summit outcome remained high; French bonds outperformed again with the10yr yield down 11bps to 3.052%; the German 10yr cash yield fell 2bps to 2.034%; yields on Italian and Spanish 10yrs fell slightly as well, down 4bps and 6bps respectively to 5.889% and 5.442%

FX EUR/USD swung more than 1.2% intraday but ended the US session little changed from Tuesday at 1.39; the euro gained 0.2% against sterling to 0.870; USD/JPY again recorded a new post-WWII low (75.71) but then bounced slightly to end 0.2% higher on the day at 76.23

€ French President Sarkozy will reportedly speak today with Chinese President Hu Jintao about Chinese participation in EFSF

€ German Chancellor Merkel and French President Sarkozy were reportedly to meet with bankers in Brussels on Wednesday night; the aim was for a £100bn reduction in Greece’s debt burden, requiring more than a 50% write-down on the value of Greek debt held by European banks

€ Germany’s Bundestag easily passed a motion on the EFSF (503 to 89) which stipulated that the EFSF cannot be financed by the ECB and that the ECB should no longer need to buy bonds in the secondary market given the EFSF’s enhanced powers; German Chanellor Merkel said the goal of Wednesday’s summit “must be to get a result under which Greece will by 2020 have a debt to gross domestic product ratio of 120%,” which signaled a haircut of 50%

€ ECB’s Draghi said that the ECB is still committed to using its non-standard measures to prevent market malfunction from blocking the transmission of monetary policy, which signals that government bond purchases will continue; he was dovish on the outlook and said "the risks of a further weakening in growth prospects are significant, in a context of great uncertainty"

€ The ECB allotted €56.9bn in 12-month loans as 181 banks bid for funds; in the 3-month tender banks took €44.6bn, a lower uptake than at July’s 3-month operation (€85.0bn) which expires today

€ Italian PM Berlusconi reportedly agreed to step down in January in order to secure support on structural reforms from his key coalition ally the Northern League party – la Repubblica news

$ The US sold $35bn in 5yr notes at a high yield of 1.055%, which stopped through the when-issued yield level at the time of auction, but was up from 1.015% at the previous auction on 28Sep; the bid/cover ratio of 2.90 was above the 4-auction average of 2.82; indirect bidders took 49.3%, the highest share since Sep’10

$ US “Supercommittee” Democrats have reportedly proposed $2.5-3.0trn in deficit reduction over 10 years, split about equally between revenue increases and spending cuts; the plan includes about $400bn in savings from Medicare cuts/changes and also proposes $200-300bn in stimulus spending – Reuters

$ US durable goods orders fell 0.8%MoM in September vs. -0.1% in August, led down by a decline in orders for transport goods (-7.5%) although the headline result was above consensus at -1.0%; orders for core goods ex-defense and aircraft jumped 2.4% vs. +0.5% previously; shipments of these items fell 0.9% in September but this was the first decline since April and the 3-month annualized pace remained elevated at +16.7% vs. +11.2% in Q2

$ US September new home sales rose 5.7%MoM to a 5-month high of 313k following a revised decline of 0.3% in August (originally -2.3%); the result was stronger than the consensus forecast of +1.7%, and may have been spurred by a price declines that were the steepest in 2 years (median: -10.4%YoY to $204.4k); the number of homes for sale remained at a series low of 163k (since 1963); the month’s supply of houses for sale (at the current sales pace) was 6.2, in line with the historic average

€ German import prices rose 0.6%MoM in September versus a decline of 0.7% in August, led by higher petroleum prices; ex-petrol prices were flat versus -0.1% in August; the annual headline pace at 6.9% was up from 6.6% in August and 6.5% in June, although down from 11.8% at the start of the year

€ Italian ISAE business confidence fell to 94.0 in October from 94.5 in September and was the weakest since January 2010

£ BoE MPC member Posen said that UK inflation has peaked and that GDP would have contracted if the BoE had not acted; the decision to undertake more QE will not “lead to an immediate boom but should fend off deflation risks”; he is confident that the UK CPI will fall below 3% by Q2’12 and below 2% by summer 2012

£ The UK CBI industrial trends survey was broadly weaker in October: the orders balance dropped 9pts to -18 and was the lowest in a year; the output balance fell to -11, the first negative reading since Dec’09 and the worst since Jul’09; in the quarterly survey, the business sentiment measure fell to -30 from -16 in the July survey and was the most pessimistic since Apr’09 during the depths of the recession

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