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Financial Markets: Headlines for November 10

November 10, 2011

EQ Equities fell sharply, EUR/USD dropped to 1.35, and Italian yields soared above 7% amid uncertainty about political leadership, a margin call increase by clearers on Italian government debt, and reports that plans for a smaller Eurozone are being discussed in France and Germany; developments amplify concerns about a vicious cycle and how Italy could be supported; the S&P fell 3.7% on Wednesday to 1229.10, the sharpest decline since 18Aug; the MSCI EM index fell 1.4% after 3 sessions of gains; Euro Stoxx 600 lost 1.7%; Italy’s main index dropped 3.8%

FI Treasuries rose and held onto the bulk of gains despite a weak 10yr note auction; the curve flattened 10bps at the 2/10s to 173; the yield on the 30yr declined 11bps to 3.028%; the ECB remained in the market but Italian yields surged ever higher after the action by the clearing houses on margins – generic 2yr yield up 80bps to 7.01%; 5yr +71bps to 7.52%; 10yr +49bps to 7.21%; the German 10yr cash yield fell 8bps to 1.717%; the UK 10yr gilt yield declined 9bps to a new crisis low of 2.174%; iTraxx W. European 5yr sovereign CDS index rose 19bps to a 1m high of 347

FX The euro fell broadly versus major currencies and was down the most sharply versus JPY and USD amid safety and liquidity bids; EUR/JPY declined 2.1% to 105.20 and was back at levels seen before the most recent Japan fx intervention; EUR/USD fell 2% to a 1-month low of 1.354; USD/JPY rose 0.1% to 77.80, down 0.4% from a week ago

$ The US sold $24 billion 10-year notes at a yield of 2.030%, down from 2.271% at the 12Oct sale, but the auction tailed; demand was weaker with the bid/cover ratio at 2.64, the lowest since Dec’09; indirect bidders received 41.6%, below the previous 6-auction average of 43.1%

$ Commissioners in Jefferson County, Alabama voted to file for a municipal bankruptcy of record size in US history

$ Fed’s Tarullo (voter): The Fed “intends to ensure that firms are on a steady path to full Basel III compliance, we do not intend to require firms to raise external capital or reduce their risk-weighted assets in order to meet any target earlier than…specified in the Basel III transition schedule"

$ The Fed offered $5bn in 28-day term deposits at a maximum bid rate of 0.75%, as “part of ongoing small-value operations designed to provide eligible institutions with an opportunity to become familiar with term deposit operations”

€ German Chancellor Angela Merkel’s Christian Democrats (CDU) may announce a proposal under which a Eurozone member state could voluntarily leave the Eurozone without leaving the EU

€ EC President Barroso warned about the consequences of some kind of euro break-up and said the German economy would contract 3% and shed 1 million jobs

€ Eurogroup Chairman Juncker said the Eurozone should move ahead together – now is not the time to subdivide

€ LCH Clearnet raised the initial margin call applied to Italian government bonds by between 3.5 and 5ppts across all maturities of BTP and inflation linked-BTPs, “because we’ve seen more volatility and less liquidity” – margin calls are impacted from today; the call on 7-10yr BTPs was increased 5ppts to 11.65%

€ The German Finance Ministry denied reports that FinMin Schaeuble had told the German budget committee that Italy was offered help through the EFSF at the G20 Cannes Summit

€ Italy’s Napolitano said the austerity plan will be passed within days and “within a short time either a new government will be formed … or parliament will be dissolved to immediately begin an electoral campaign”; PM Berlusconi said that new elections should be held after his resignation

€ Greece: there was still no official announcement about a new PM for the “unity” government

$ US wholesale inventories fell for the first time since Dec’09, down 0.1%MoM in September, a result below the consensus forecast of +0.5%; the August gain was revised down to +0.1% from +0.4% originally reported

€ French business sentiment published by the Bank of France fell to 96 in October from 97 in September and was the weakest since Sep’09

£ UK BRC shop price growth slowed for a 3rd consecutive month, to +2.1% in October from +2.7% in September, matching a pace last seen in Dec’10; food price growth at 4.2% was the weakest since March, reflecting discounting at supermarkets; non-food prices slowed further to +0.8% from +1.3% in September

£ UK foreign trade balance in goods fell to -£9.8bn in September from a revised -£8.6bn in August (originally -£7.8bn); the September deficit was larger-than-expected (median -£8.0bn) which brought the Q3 figure to the highest level on record (-£27.2bn); exports were up just 0.3% on the quarter, highlighting the negative impact from the Eurozone crisis and slowing growth, while imports rose 2.9%

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