Financial markets continued to demonstrate large volatility with equities rallying, bonds slumping, risky assets strengthening and commodities (except for gold) advancing yesterday. The abrupt improvement in market sentiment was brought about by the better-than-expected US initial jobless claims and the news that German Chancellor Merkel and French President Sarkozy would meet next Tuesday to discuss further measures to contain the Eurozone debt crisis. Meanwhile, Italian Finance Minister Tremonti pledged to bolster growth and public finance. As risk appetite increased and USD weakened, oil prices rose for the second consecutive day. The front-month contract for WTI crude oil price soared to the highest level in 4 days and settled at 85.72, gaining +3.41%, while the equivalent Brent crude contract climbed and ended the day at 108.02, up +1.26%. Gold retreated after surging to a new record of 1817.6 earlier in the day amid profit-taking and market reaction to CME's increase in trading margins. The benchmark Comex contract closed at 1751.5, down -1.84%.
European bourses jumped 2-3% yesterday. Optimism was driven by the news that Germany and France would be meeting next week to discuss credible measures to resolve the sovereign debt problems in the 17-nation region. Italian Finance Minister Tremonti discussed his deficit-consolidation plan with lawmakers as they are going to vote on it. Tremonti sought to increase the capital gains tax to 20% from 12.5%, sell assets and liberalize labor market laws (e.g.: hiring and firing practices) so as to reduce the country's deficits. Together with the 48B euro measure announced in July, the government planned to lower the deficit to 1.5-1.7% of GDP in 2012 and then to zero in 2013.
Meanwhile, the market stabilized after the announcement that European Securities and Markets Authority would impose bans on short-selling from today. In a statement issued by the Authority, regulators will impose or extend existing short-selling bans to 'restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets'. It added that while 'short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive'.
Wall Street was boosted with DJIA and S&P 500 gaining +3.95% and +4.63% respectively as initial jobless claims surprisingly fell to 395K in the week ended August 6, down -7K from the prior month. The market had expected a mild dip of -1K only. The bigger-than-expect drop also resulted in sending the 4-week average to 405K, the lowest level since April 6. As far as today's dataflow is concerned, US retail sales probably gained +0.5% m/m in July following a +0.1% rise in the prior month. Excluding auto, retail sales might have climbed +0.2% after staying flat in June. University of Michigan confidence index probably slowed to 63 in August from 63.7 in July.