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Financial Markets: Headlines for November 8

November 8, 2011

EQ US equity indices moved between gains and losses but the S&P 500 closed up 0.6% at 1261.12 on Monday, cutting into last week’s loss of 2.5%; in the latter half of the US session, ECB’s Stark said he expects that the Eurozone crisis will be under control in 1-2 years and then not require more “acute political actions”; the Eurogroup signaled that the EFSF could be operational in December; bourses in the Eurozone closed mixed as Greek and Italian political developments remained at the forefront; the Italian FTSEMIB gained +1.3% and Greece’s ASE +1.4%, outperforming the German Dax (-0.6%) and French CAC (-0.6%)

FI USTs ended flat to lower; the yield on the 10yr touched an intraday low of 1.930% but bounced up to end flat versus Friday at 2.037%; Italian and Greek bonds remained under pressure, exacerbated by uncertainty related to political leadership; the Italian 2yr shot up 57bps to 5.91% and the 10yr yield rose 30bps to 6.64%; the yield on the Greek 2yr (Aug’13) rose more than 600bps to 98%; Bunds rose and the 10yr cash yield fell 4bps to 1.776%; the French-German 10yr yield spread widened to a new euro-era high of 130.4bps

FX The Swiss franc declined across the board versus major currencies as SNB officials affirmed that they could take more action to weaken the franc if necessary; EUR/CHF surged to an intraday high of 1.242 during the US session, up 1.8% from Friday; the euro was lower against most of the rest of the G10; EUR/GBP fell 0.3% from Friday to 0.857 and was down 0.5% from a week ago; EUR/USD lacked direction, hitting an intraday low of 1.368 and finishing the US session at 1.378; gold surged 2.1% to $1792.9oz, up at the highest levels since mid-September

$ Fed’s Rosengren (non-voter) argued for more monetary policy action to boost demand and reduce unemployment: "Given the very weak labor market conditions and the low expected inflation rate, the Federal Reserve should in my view continue to take action to aggressively try to reduce the stubbornly high US unemployment rate”

$ US consumer credit increased $7.4bn in September after the decline of $9.7bn in August (originally -$9.5bn) which was the first since Sep’10

€ Eurogroup Chairman Juncker welcomed the intention of Greece to form a national unity government and said the Troika will return to conclude talks; Eurogroup remains willing to conclude the 2nd aid programme by the end of the year; on Italy, the ECB will also take part in monitoring progress on reforms; on EFSF, the decision on how to leverage will now be discussed with market participants in hopes of reaching a conclusion by the end of this month with implementation in December

€ A document prepared for the Eurozone finance ministers about “maximizing the capacity of the EFSF” gave greater detail about the options under consideration: 1) partial risk protection – sovereign bond guarantees on primary issuance would be triggered by missed payments of principal or interest due; the guarantee portion could be separable and freely traded after issuance; 2) the co-investment fun approach – set up of one or more dedicated CIFs “designed to attract external capital sources, maximising EFSF resources and to provide a degree of credit protection to investors” through different capital layers; the CIF would “invest in primary or secondary sovereign bonds of a country which has entered into a Memorandum of Understanding specifying conditionality”

€ Greek PM Papandreou will step down as a “unity” coalition government is formed in Greece although negotiations were ongoing and a new head of government was not announced on Monday; the new government will be charged with implementing the requirements of the European leaders decisions from Oct. 26; elections will be held in February or March

€ ECB’s Stark assumes that “the crisis will be under control, if not overcome,” in 1-2 years at the latest; “Overcome in the sense that acute political actions are no longer necessary"

€ Italy’s PM Berlusconi defied calls for his resignation

€ French PM Francois Fillon outlined a second austerity package for France in under 3 months – WSJ

€ The ECB bought €9.52bn in bonds through the Securities Markets Programme versus €4.0bn in the week prior, bringing total settled purchases to €183bn

€ The EIB could lend up to €74bn to banks over 2 years if it got more cash injections from its shareholders; "A temporary reinforced EIB support to the European banking sector for investment in the real economy could amount over two years to…74 billion euros…with reinforced support through capital injection” – Reuters

CH SNB Chairman Hildebrand: "The franc is still highly valued versus the euro…We expect it to weaken further over time. If that was not the case, it could lead to deflationary trends and weigh strongly on the economy. If the economic outlook and the deflationary development make it necessary, we are ready to take further measures"; SNB’s Jordan reiterated the view: "If there’s a need for action…then we’re prepared to take further steps”

€ Eurozone retail sales fell 0.7%MoM in September versus +0.1%% in August; sales growth was flat in Q3 versus -0.3% in Q2; the September decline was led by a drop in non-food product sales, down 0.8%MoM vs. -0.1% previously

€ German industrial production declined 2.7%MoM in September and disappointed versus consensus at -0.9%; the August decline was revised to -0.4% (originally -1.0%); manufacturing & mining output dropped 3.0%, the sharpest decline since Feb’09; energy (-0.7%) and construction (-0.8%) output also fell on the month

£ UK Halifax house prices rose 1.2%MoM vs. a revised decline of 0.3% in September (originally -0.5%); in the 3 months to October prices were down 1.8% from a year ago, which was the shallowest pace of decline since Dec’10

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