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Financial Markets: Headlines for October 28

October 28, 2011

EQ European equities surged on Thursday and the Euro Stoxx 50 closed near the session high, up 6.1% at 2476.92; banks led the charge (+12.1%) but all stocks posted gains in some initial euphoria as the broad conclusions from the Eurozone leaders’ summit, including the haircut decision on privately held Greek debt, removed uncertainty, forestalled the chances of a disorderly default, and confirmed commitment to working toward greater economic integration; US indices rose sharply as well and the S&P closed at the highest level since 1Aug, up 3.4% also led by financials (+6.0%); the Dow closed above 12k for the first time since August, up 2.9% to 12208.55

FI US Treasuries plunged on Thursday during the risk rally, as did Bunds and Gilts, while peripheral Eurozone bonds made some gains; the yield on the US 10yr jumped 19bps to 2.396%, the highest since 5August; the Bund yield climbed 17bps to 2.203%; the Italian 2yr yield fell 14bps to 4.350% but the 10yr yield fell only 3bps to 5.862%; the Greek 2yr (08/20/13) yield dropped 260bps to 72.9% but was still well-above the 50dma of 59.0%; iTraxx 5yr W. European CDS index fell 46bps to 287 and was the lowest since mid-August

FX The euro strengthened sharply versus the dollar, up as much as 2.5% and briefly above 1.42 in the latter half of the US session; following the US market close the pair was up 2.1% at 1.419; the dollar fell across the board versus major currencies as riskier assets surged; USD/ZAR fell 3.2% to 7.702; USD/JPY declined 0.3% to 75.99 although the yen was down broadly as well on Thursday

$ The US sold $29bn in 7yr notes but the auction tailed and the yield of 1.791% was up sharply from 1.496% at the previous similar auction on 29Sep; the bid/cover ratio of 2.59 was below the previous 6-month average of 2.82; indirect bidders took 33.9%, the lowest share since June

€ ECB’s Weidmann said it is a positive development that the EFSF will not be financed through the ECB; the decisions should mean that the risks for monetary policy are markedly reduced, meaning there will be greater separation between monetary and fiscal policy

€ German Chancellor Merkel said the leaders’ created a good general package of measures but there are many more steps to take; there will a permanent troika presence in Greece

€ German Deputy Finance Minister Asmussen: pledges from Italy and Spain must be implemented to make effective the whole package of Eurozone crisis measures; he said Italian debt is sustainable because the country can finance itself on capital markets; he expects no restructuring of Greek debt held by the public sector

€ EU Economic Commissioner Rehn: a paper about Eurobonds and other alternatives will be presented soon, but there will not be any legislative steps taken

€ Spanish Economy Minister Salgado believes that Spanish banks will not need public sector help to meet the new capital requirements

€ ECB’s Coene said that a technical Eurozone recession – 2 quarters of GDP contraction – is possible

£ UK BoE MPC member Fisher thinks there is “a significant chance” of a near-term UK recession; “the overall combination of a tight fiscal policy and loose monetary policy is the right one for the country at the moment"

$ US GDP rose at a faster annualized pace of 2.5% in Q3 according to the advance estimate, up from +1.3% in Q2 and 0.4% in Q1; the result was in line with the consensus forecast although personal consumption increased more-than-expected, up 2.4% in Q3 versus +0.7% in Q2, as consumers saved less; real after-tax incomes fell 1.7% at the fastest rate since Q3’09; fixed investment rose at an annualized pace 13.7% vs. +9.2% previously; the positive contribution from net exports was steady at +0.2ppts; government consumption was flat vs. -0.9% in Q2; inventories rose at a slower pace and subtracted 1.1ppts from headline growth

$ US price measure of core personal consumption expenditures (ex-energy & food) slowed slightly to 2.1% from 2.3% in Q2 which had been the fastest since Q2’08

$ US initial jobless claims were slightly lower at 402k in the week to October 22 versus an upwardly revised 404k in the week prior (initially 403k); the result was broadly in line with the median forecast of 401k; the 4wk moving average was little changed at 406k, down from 418k a month ago

$ US pending home sales fell for a third consecutive month, down 4.6%MoM in September versus -1.2% in August to disappoint versus the consensus forecast for an increase of 0.4%; the result signals that closings on purchases of existing homes likely fell again in October

€ Eurozone EC industrial confidence index fell as expected to -7 in October from -6 in September and was the weakest since Apr’10; the consumer confidence index was confirmed at -20 down from -19 previously

€ Eurozone M3 money supply rose at a faster 3m annualized pace of 2.6% vs. 2.3%, the strongest since Aug’09; loan growth from banks to the private sector was steady at 2.5%YoY

€ The preliminary German CPI for October fell to 2.5%YoY from the 2011 high of 2.6% recorded in September

£ UK CBI reported retail sales balance rose to -11 in October from -15 in September but the 3-month average was the lowest since Aug’09; sales for the time of year were judged to have contracted at a faster pace, with the balance at -34 vs. -30 previously, the lowest since May’09

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