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Financial Markets: Headlines for November 17

November 17, 2011

EQ The S&P 500 fell sharply in the last hour of trading and ended down 1.7% on the day at 1236.91; financials led the drop (-2.5%) as Fitch warned that further contagion from stressed Euro area markets poses a “serious risk” to US banks – the “outlook for the industry is stable…However risks of a negative shock are rising and could alter this outlook”; Euro Stoxx 50 rose 0.6% on Wednesday after the 3.1% decline recorded in the first part of the week; gains were led by consumer services (+2.4%) and oil & gas (+1.3%)

FI Longer-end UST yields headed lower late in the session as sentiment deteriorated; the 10yr yield fell 5bps to 1.999% and the 30yr was down 6bps to 3.028%; Italian bonds stabilized as the ECB reportedly bought larger-than-usual quantities of Italian debt in the European session; the 10yr yield fell 6bps to 6.989% after Tuesday’s advance above 7%; Spanish and French bonds remained under pressure on Wednesday in the run up to today’s auctions; the Spanish 10yr yield rose 8bps to 6.349% and the French was up 2bps to 3.686%; the benchmark Bund future declined 56 ticks to 138.15; the UK 2yr gilt yield fell 1bp to 0.475% and short-sterling futures rose slightly out the curve as the BoE lowered their CPI projections and Gov. King said activity “could be broadly flat until around the middle of next year”

FX EUR/USD fell early on Wednesday to the lowest level in more than a month and ended the US session down 0.5% at 1.347; the dollar and yen outperformed on the session, while sterling fell broadly versus major currencies amid warnings about the economic outlook from the BoE and a rise in the UK unemployment rate; Cable fell below the 50dma, down 0.6% to 1.573 which was the weakest since 21Oct

OIL WTI Dec’11 crude jumped above $100bbl as Enbridge Inc. agreed to acquire a share of pipeline that runs between Cushing, OK and the Gulf and said they could reverse the flow of oil which may alleviate a bottleneck that had been depressing the price of WTI

$ Fed’s Lacker (voter in 2012) said the economy would be better served by Fed purchases of Treasuries than MBS; he supports an explicit inflation objective as the most important step the Fed could take to enhance transparency; banks have done a lot to prepare for potential fallout from the crisis in Europe but he is less confident about the money market funds

$ The NY Fed “informed its primary dealers today that it will require dealers to margin against their outstanding agency MBS forward transactions with the NY Fed. Dealers are required to post collateral in a number of other types of operations with the NY Fed" – Reuters

€ Portugal sold €1.1bn in 3- and 6-month bills within a target range of €0.75-1.25bn; the yield at the 3-month sale was lower at 4.895% versus 4.972% at the 19Oct sale; bid/cover stronger at 2.4 vs. 2.0 previously

€ Mario Monti was sworn in as Italy’s Prime Minister and unveiled a 16-member cabinet; he will act as Economy Minister as well; today he will present his reform plans to the Senate, after which a confidence vote is expected in both houses of parliament

€ Greek PM Papademos won a vote of confidence on Wednesday, gaining 255 votes in support of the national unity government out of 300; the PM will meet with the head of the IIF today to discuss the loss-plan for private bondholders; New Democracy party head Samaras remains opposed to signing a written agreement on meeting terms for the EU/IMF bailout

€ EC President Barroso said the crisis is now “truly systemic” and “requires an even stronger commitment from all and that may require additional and very important measures”; deeper integration, an economic union, is required; once complete, “stability bonds” will be a natural step; stronger integration is also needed within the entire EU

€ Chancellor Merkel said Germany is willing to "cede a bit of national sovereignty" to underpin the euro; treaty changes are needed

€ Irish PMKenny said there is an immediate need for a credible liquidity backstop; “ultimately that’s the ECB” although he acknowledged there were diverging views; the EFSF “has proven not to have the confidence of the markets”

£ UK BoE Inflation Report: the central projection for the UK CPI was lowered over the forecast horizon, despite the assumption of £275 in BoE asset purchases vs. £200bn previously and current expectations that Bank Rate will stay low-for-longer; the fan charts show the CPI at about 1.3%YoY in 2 year’s time, below the August 2yr-projection of 1.7% and further below the 2% target, which signals scope for more asset purchases; BoE Gov. King outlined weaker expectations for near-term UK economic growth than in the August Inflation Report and said activity “could be broadly flat until around the middle of next year”; by end-2012 growth is expected at about 2% vs. 2.2% in the August projections; the fan charts indicate greater chance of a recession over the next 18 months

$ US industrial production rose 0.7%MoM in October and exceeded the median forecast of +0.4%, although the September figure was revised down to -0.1% (originally +0.2%); manufacturing output rose for a fourth consecutive month, up 0.5% vs. +0.3% previously; vehicle production jumped 3.1% vs. 0.4% previously and ex-vehicle manufacturing was up at a steady pace of 0.3%

$ US NAHB index of homebuilders’ sentiment rose to 20 in November from a downwardly revised 17 in October (originally 18); the index was the highest since May’10

$ The US CPI fell 0.1%MoM in October versus a gain of 0.3% in September; the decline was the first since June and reflected a drop of 2.0% in energy prices and -0.4% for vehicles; food & beverage price growth slowed to +0.1% from +0.4% previously; excluding food & energy, the core CPI rose at a steady pace of 0.1%

$ US net long-term TIC flows accelerated to $68.6bn in September from $58.0bn in August amid the market turmoil and were the strongest since Nov’10; private foreign investors bought net $45.7bn in Treasury notes & bonds vs. $69.7bn in August, while “official” foreign investors ramped up purchases to $37.3bn after net sales of $8.7bn in August; however purchases have slowed sharply versus a year ago — in the 12 months through September, foreigners net purchases of US long-term securities were $472.0bn vs. $837.4bn in the 12 months through Sep’10

€ Eurozone CPI was confirmed at 3.0%YoY in October unchanged from September at the highest level since Oct’08; the core measure ex-energy, food, alcohol & tobacco held at 1.6%YoY, above the YTD average of 1.4%

£ The UK ILO unemployment rate rose to 8.3% in the 3 months through September from 8.1% in August; this marked a new cycle high and matched a level last seen 15 years ago in Jun’96; average earnings growth ex-bonuses was the weakest since Jul’10, at 1.7%YoY in the 3 months through September, down from 1.8%YoY in the 3m to August

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