Sunday, 10 July 2011

Markets and Macro update - What a difference a day make...

Not much...
If you thought Wednesday wasn't great, Thursday and Friday were pretty dire when it comes to market movements and macro updates.

Macro updates:
China’s trade surplus higher than forecasted to the tune of 22.3 billion USD in June 2011, highest level in seven months. Imports grew at the slowest pace since 2009. This mean no stop in money tightening from the PBOC hence the latest rate increase on July 5 because Consumer prices climbed 6.4% last month, the most in three years. Reserve requirements will be raised again during the second part of the year, in an attempt to cool things down. Good news is Imports, which jumped 19.3 percent to 139.7 billion USD, have had the weakest expansion since gains resumed in November 2009 after a year-long decline. Slower imports means the economy is cooling.

The U.S. unemployment rate climbed in June to 9.2% following a very weak NFP, which printed at a miserable 18K, from a previous weak 54K in May revised down to 25K. What really transpired from the ugly unemployment data, was the fall in the participation rate to 64.1% (percentage of the working age population in the labor force). The employment population ratio in the US fell to 58.2%, matching the lowest level reached during the current employment crisis.As a reminder, in terms of unemployment, the 2007 crisis is still the worse since WWII.
For the US summary - CalculatedRisk - Summary for Week Ending July 8th
This is clearly a threat to consumer spending in the world’s biggest economy.
The European Central Bank raised its benchmark interest rate on July 7 by 25bps as expected to 1.50%.

The US debt ceiling saga goes on like a bad soap opera. Ending season is 2nd of August as a reminder.
Next week we get US CPI on the 15th and Ben Bernanke gives us is semi-annual Monetary Policy report to Congress.
Thusrday 14th we also get the weekly unemployment claims report in the US. Consensus is for a decrease to 405K from previous 418K. We will as well, ge the data around retail sales in the US for June. Retail sales were impacted postively by a fall in gasoline prices, what matters theregore is the reading ex-gasoline prices.
What we need to watch closely next week is the Empire State Manufacturing index, for July. Will it display a return to expansion?

Update on bank failures in the US: 3 more banks closed on Friday (51 so far in 2011). First Chicago Bank & Trust, Chicago, IL (959 million USD); Colorado Capital Bank, Castle Rock, CO (718 million USD); and Signature Bank, Windsor, CO (67 million USD).

US Bank Failures Abate In 1st Half But Likely To Stay Elevated - WSJ

"U.S. bank failures have slowed in 2011 from the flood of recent years, but a large reservoir of problem banks will keep the failure rate relatively high as regulators slog through the backlog."

"The first half included 48 bank failures, down from 74 in the second half of 2010 and 86 in the same period last year, which was marked by three large failures in Puerto Rico. The total assets at failed banks also dropped sharply from a year earlier, off 73%, but remained relatively steady sequentially."

For the backlog - one very good source - CalculatedRisk blog!
Problem Bank List July 8, 2011 (Unofficial)
1004 institutions as of July 8th.

Finally we get next Friday the results of the European bank stress tests. No test, no stress, no stress, no test...

Market updates:
Records keep being broken in Europe...
Portuguese bond yields posted their biggest weekly gain in more than 14 years.
Portuguese two year notes climbed 453 bps to close at 17.50%. Biggest increase since April 1996 according to Bloomberg. On July 7, the yield reached an all time high of 18.28%. The 10 year climbed 199 bps, as well biggest advance since at least 1997.
Italian 10 year yields up 40bps to 5.27%, highest level since 2002. Italy 5 year Sovereign CDS trading at 243 bps, wider by 24 bps.
Italian banks stocks and CDS got seriously whacked in the process:
UniCredit, Italy's biggest bank, down 7,8% to 1.23 euros (lowest level since April 2009). Unicredit 5 year Seniort CDS wider by 31bps to 260 bps.
Intesa, second largest bank, down 4.6% to 1.65 euros. Intesa 5 year Senior CDS wider by 13bps to 200 bps.
Monte Paschi, down 3% to 51.6 euro cents. Down 39.42% since the 1st of January and down 70.91% for the last three years.

Italian banks raised so far 10.5 billion euros this year to strengthen their capital.

Eur/USD closed the day to 1.4228, erasing all the gains registered following Jean-Claude Trichet's speech on Thursday following the rate hike.

Potential CDS payout on Portugal, Ireland, Greece and Spain in the case of a credit event:

Total net notional payout amounts to 33.5 billion USD.

So much for a nice and quiet summer.

To be continued...

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