Daily Market Commentary for June 14, 2012

Well known foreign exchange broker FXCM Inc. (FXCM: NYSE) took hold of up to a 50% controlling stake in boutique computer-model driven trading firm Lucid Markets Trading Ltd. Thursday, in a deal that underscores the growing clout of these new, often high-speed trading firms.
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The financial crisis that has seized the Spanish government expanded Thursday as its borrowing costs hit a new euro-era high, touching levels that are widely viewed as unsustainable. The same levels that have previously forced fellow euro-zone countries Greece, Ireland and Portugal to seek sovereign-debt bailouts. The move followed yet another sovereign-credit downgrade and coincided with fresh evidence Thursday that the Spanish economy has continued to deteriorate as the decline of Spanish housing prices accelerated to a 12.6% annual rate in Q1. Additionally, a rise in Spanish bank borrowing from the European Central Bank has further highlighted the increased difficulties local institutions face to obtain financing on international markets. These same difficulties in part led the Spanish government to just last week, ask for a European Union bailout of up to 100 billion euros ($125 billion) to shore up its banks. The yield on Spain’s 10-year government bond (ICAPSD:ES:10YR_ESP) rose as high as 6.96%, a new euro-era record and dangerously close to levels considered as unsustainable. Moody’s Investors Service on Wednesday became the latest ratings agency to downgrade the beleaguered Iberian nation’s debt, increasing speculation that a full bailout for Spain is not, far away. The three-notch downgrade left Spain’s rating just one level above junk, as Moody’s highlighted the increase to the country’s overall debt burden arising from the proposed bailout of Spanish banks. After over a decade of overbuilding accompanied with a rapid run-up in prices, Spain’s housing boom came to an abrupt halt in 2008, sending the economy into a tailspin. Spanish housing prices have been slow to rebound, largely because banks have been reluctant to unload repossessed properties at lower prices - something new government regulations now force them to do. Moody’s late Wednesday lowered the Spanish government’s credit rating to Baa3, one notch above noninvestment grade, citing Spain’s economic deterioration, banking difficulties and increasing problems to access external finance.

The U.S. Labor Department reported Thursday that the number of Americans who filed requests for jobless benefits rose by 6,000 last week to 386,000. Claims from two weeks ago were revised up to 380,000 from 377,000. Over the past four weeks, the average of new claims increased by 3,500 to 382,000 striking the highest level in six weeks. Continuing jobless claims - reported with a one-week lag - decreased by 33,000 to a seasonally adjusted 3.28 million in the week ended June 2. Nearly 5.82 million people received some form of state or federal benefit in the week ended May 26, down 145,990 from the prior week. Total claims are reported with a two-week lag.

The Commerce Department reported Thursday that the nation’s current account deficit widened to a three-year high of $137.3 billion in Q1. The department said it is the largest U.S. deficit since the Q4 2008. The wider gap reflected a decrease in the surplus on income and a greater deficit on goods and services. The current account is the broadest measure of international flows of goods, services and capital in and out of the United States and measures how much Americans need to borrow from abroad to fund their consumption and investment. During Q4 2005, the deficit peaked at 6.5% of gross domestic product and since the financial crisis, it has shrunk as low as 2.4%, a level seen in Q2 2009. During Q1 2012 the current account deficit totaled 3.6% of gross domestic product, the highest percentage since Q4 2008. In Q1 2012, surplus on income decreased to $47.6 billion from $59.9 billion in the final quarter of 2011, in part due to rising dividend payments to foreigners. U.S. investment income from assets owned abroad fell to $181.0 billion from $185.4 billion while foreign investment income from assets owned in the United States rose to $131.6 billion from $123.6 billion. During Q1 2012, net financial inflows increased to $156.7 billion from $63.4 billion as U.S. assets abroad decreased. The U.S. trade deficit increased to $151.0 billion during !2 2012 from $146.3 billion in Q4 while unilateral transfers rose to an outflow of $33.9 billion from $32.2 billion.

Marking the biggest decline in three and a half years, the Labor Department reported Thursday that U.S. consumer prices fell 0.3% in May as the cost of gas fell sharply. The gas index fell hard by 6.8% striking the largest drop since December 2008. So-called core prices, which strip out volatile food and energy costs, rose a seasonally adjusted 0.2% last month. Consumer prices have risen an unadjusted 1.7% over the past 12 months, down from 2.3% in April. The core rate has increased 2.3% over the past 12 months, the same as in April. Inflation-adjusted hourly wages on average, rose 0.3% in May with a 0.1% increase in average hourly earnings, combined with the 0.3% drop in the cost of living, accounted for the gain.

According to the latest data from the NYSE Euronext (NYX: NYSE) unit, program-trading activity dropped on the New York Stock Exchange last week as the overall volume fell from a week earlier. For the week ended June 8, average daily program-trading volume totaled 475.2 million shares, making up roughly 29.8% of the average daily trading volume. In the previous week, program trading totaled 745.9 million shares, making up about 38.2% of the average daily trading volume. For the latest week, average daily total volume was 1.6 billion shares, down from the prior week's 1.95 billion shares.


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