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Financial Markets: Headlines for November 15

November 15, 2011

EQ Major US and European indices fell on Monday and reversed last week’s gains; investors remain wary despite the changes in Greek and Italian political leadership; Italy sold 5yr BTPs at a higher average yield of 6.29% on Monday vs. 5.32% in Oct. and UniCredit (UCG, -6.2%, €0.774) announced it will sell shares to raise €7.5bn; US stocks weakened throughout Monday’s session and the S&P 500 lost 1.0% to 1251.78, negating last week’s tepid increase of 0.9%; most Eurozone bourses ended weaker although Greece’s ASE gained 1.0%; Euro Stoxx 50 fell broadly across sectors, down 1.6% to 2288.32 led by utilities (-2.6%) and financials (-2.4%) which erased the previous week’s gain of 1.5%

FI US bond markets reopened but USTs finished the session little changed from Thursday; the US 10yr yield closed flat at 2.056% and the 30yr yield fell 2bps to 3.106%; Gilts and Bunds rallied and 10yr yields fell 11bps; performance was mixed across other parts of the Eurozone; Italian bonds resumed sharp declines and the yield on the 10yr jumped 26bps to 6.676%; the Spanish 10yr yield rose 25bps to 6.039%; the French rose 6bps to 3.402% and the spread vs. Germany at 164 was just 5bps below Thursday’s euro-era high

FX EUR/USD fell during the European session and stabilized above 1.36 by the US close, down 1.2% from Friday and -1.1% from a week ago; EUR/CHF declined 0.2% to 1.237 in choppy trade; the yen and dollar gained broadly versus major currencies underlining the cautious tone; Cable fell 1% to 1.589

$ Fed’s Yellen (voter) said that the Fed will begin a new round of bank stress tests in a couple of weeks; the downside risks to the US economic outlook remain “significant”; due to global linkages, “further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States”; short-term funding markets remain an important source of structural risk

€ Italian sold €3.0bn in 5yr notes at an average yield of 6.29%, the highest yet in the euro-era and up from 5.32% at the previous similar auction on 13Oct; the bid/cover ratio was 1.47 vs. 1.34 last month

€ The ECB settled €4.5bn in bond purchases last week under the Securities Markets Programme versus €9.5bn in the week before; SMP holdings now total €187bn

€ German FinMin Schaeuble said Germany is fairly alone in its stance that the ECB should not be used to finance states; it makes sense for the ESM to be activated before mid-2013 but this would be difficult because parliamentary approvals are needed; he wants changes to the Lisbon Treaty by end-2012 that would allow the Eurozone to “establish structures for a common fiscal policy, alongside our common monetary policy" – "The most important thing is quick agreement on the structures for a fiscal union"

€ ECB’s Weidmann: "The crucial point is that the Eurosystem is not permitted to lend to Eurozone member states – no matter whether this is done directly or indirectly by using the IMF as an intermediary," on Italian bond yields, "of course this level may not be sustainable in the long run if there is a lack of fiscal discipline and economic growth remains low. But in the short run I do not think it is such a big an issue."

€ German Chancellor Merkel addressed her party’s conference and said it time to bring about “political union” in Europe; "Europe is in one of its toughest, perhaps the toughest hour since World War Two"

€ German Chancellor Merkel’s party the Christian Democratic Union approved a resolution that would permit Eurozone states to decide to quit the currency union – the resolution is not yet law and would require the assent of the other 2 coalition partners

€ Greek PM Papademos said staying in the euro is the only choice; the first priority of the new government is to unlock the 6th tranche of EU/IMF aid; the 2nd priority is to complete talks with the Troika on the next bailout – there will be an official announcement soon about the bond exchange; a new fiscal adjustment programme is needed in Greece and structural reforms must implemented quickly

€ Eurozone industrial production fell across all sectors in September, down 2.0%MoM versus the median forecast for a sharper decline of 2.3%; the August gain was revised up to 1.4% (originally +1.2%); over the quarter, production contributed positively to growth and was up 0.9% vs. -0.6% in Q2, although the manufacturing PMIs signal declines in Q4

¥ Japan’s GDP rose 1.5%QoQ in Q3, the first increase since Q1’10, and the Q2 decline was revised to -0.3% from -0.5% previously reported


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