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EUROPEAN OPENING NEWS INCLUDING: S&P sees downgrade blitz in EMU recession, threatening crisis strategy

Last updated: 04:09 21 Oct 2011 EDT, First published: 03:09 21 Oct 2011 EDT

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ASIA

JGBs traded in a thin range overnight as investors awaited more signals from Europe from leaders working out the details of a plan to contain the Eurozone’s debt crisis. JGBs were trading at 142.38 (+0.05) at 0613BST. (RTRS)

US

T-notes came under pressure yesterday largely on EU headlines, in an unpredictable session and despite a very solid 30y TIPs auction. Initial fears this weekend’s EU summit had been cancelled boosted safe-haven assets, however news the EU seems to be close to reaching an agreement on the size of the EFSF and its constitution saw asset reallocation out of fixed income and into equities. At the pit close, T-notes settled at 128.222, down 5 ticks. Finally, DJIA closed up 0.32% at 11541.78, S&P 500 up 0.46% at 1215.39 and NASDAQ down 0.21% at 2598.62.

Fed’s Tarullo said the Fed should consider buying more mortgage bonds to support a fragile economic recovery and a downtrodden housing sector. (RTRS) Also, Fed’s Kocherlakota said he sees the US unemployment in 8.5% range by the end of 2012.

Fed’s balance sheet fell to USD 2.835trl on October 12, compared to USD 2.843trl a week earlier. Also, foreign central banks’ overall holdings of US marketable securities at the Fed rose by USD 9.4bln in the week ended October 19th, to stand at USD 3.411trl. (RTRS)

Yesterday’s USD 7bln 30y TIPS auction drew a much lower yield of 0.999% vs. Exp. 1.038%, B/C was seen at 3.06 vs. Avg. 2.78 (Prev. 3.02), Indirect bidding was 43.2% vs. Avg. 38.83% (Prev. 22.86%) and the Allotted at high was 87.47%. (RTRS)

The US Senate defeated a piece of President Obama’s jobs plan, a USD 35bln package to help cash-strapped states employ teachers, police and emergency workers. (Sources)

EUROPE

**EU are said to weigh increase in bailout lending to USD 1.3trl.** 
EU leaders are nearing a consensus to start the permanent fund in mid-2012 and are said to consider a swap for EFSF bonds at 50% of face value. (RTRS/Sources) EU leaders may combine the EUR 440bln and EUR 500bln funds and may drop EUR 500bln ceiling in bailout funds, with 5 options for a revised Greek debt exchange and debt swap options with and without collateral. The EU also said they see Greece needs up to EUR 20bln since the July deal. 

French president Sarkozy and German chancellor Merkel are to review the comprehensive plan to fix the Euro-zone at Sunday’s EU summit and are aiming for approval by next Wednesday at the latest according to a Franco-German statement. (Sources) They agreed the Euro-zone needs a new operating method of the EFSF and an EU Banking recapitalisation plan to strengthen Bank capital. France and Germany also want an immediate start of negotiations with private sector Greek bond holders to find an accord on Greek debt. 

S&P sees downgrade blitz in EMU recession, threatening crisis strategy. (Telegraph)
S&P is to warn that a double-dip recession in Europe would imperil France's AAA rating and set off a string of downgrades across Southern Europe, undermining the EU's debt crisis strategy.

France is preparing to cut 2012 GDP growth forecast, according to Le Figaro. The paper said that cutting the forecast below 1.5% would leave the government needing to either cut spending or raise taxes in order to meet 2012 budget deficit target of 4.5% of GDP. (Le Figaro)

FT writes 'EU shake up for rating agencies' (FT More) 
Sweeping changes to regulation of credit ratings are to be proposed by Brussels that would deal a blow to the business models of the big three agencies that issue them. Under one of the most contentious proposals European regulators would be given powers to suspend credit ratings of countries undergoing bailouts

EU's Rehn said that EU leaders must consider what the EU constitution allows, noting a direct link between ECB refinancing and the EFSF could be difficult. (Sources) Oli Rehn said treaty change should be on the agenda at the weekend summit and agrees Eurozone bonds should only come at the end of the road. EU's Rehn reiterated that Greek PSI should be 'preferably on a voluntary basis' and Greek private sector contribution must be based on July’s template.

The Greek Government last night secured the parliament votes for financial approval of a controversial austerity bill with a final count of 154 yes vs. 144 no. (RTRS/Sources)

FX

EUR/CHF and USD/CHF traded lower overnight as analysts note position adjustments ahead of weekend election. (IFR)

NY Fed says USD 1.853bln borrowed via dollar swap facility in latest week. (RTRS)

Australia Import Price Index (Q3) Q/Q 0.0% vs. Exp. 0.5% (Prev. 0.8%)
Australia Export Price Index (Q3) Q/Q 4.0% vs. Exp. 3.6% (Prev. 6.0%) (RTRS)

GEOPOLITICAL 

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COMMODITIES 

WTI crude futures rose overnight on optimism policymakers will move closer to resolving the Eurozone’s debt crisis at a meeting this weekend and stem any slowdown in oil demand. WTI crude futures were trading at USD 86.62, up USD 0.55, at 0639BST. (RTRS)

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