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Financial Focus

Demand from banks eager to shore up their liquidity buffers has been a key supporting factor for gilts over the past year, BoE figures revealed yesterday. UK banks and building societies bought £36.1bn of gilts in the 6 months to April, up from £11.4bn in the prior 6 month period. Overseas buying of gilts meanwhile, fell sharply. “Banks are buying gilts partly under regulatory pressure but also because private sector demand for bank loans remains weak,” Henderson’s Simon Ward said.

A WAVE of surprisingly weak data on the U.S. economy may spur Federal Reserve policy makers to support growth by making it clear they are in no hurry to shrink the central bank’s record balance sheet. There is a “strong possibility” that the Federal Open Market Committee will say that it will keep reinvesting proceeds from maturing debt for a while. Previously the FOMC has said it will keep the benchmark interest rate near zero for an “extended period” without a similar pledge about its balance sheet.

MARKETS:

ASIAN stocks dropped for the first time in 3 days after U.S. manufacturing expanded at the weakest pace in more than a year and employers hired fewer workers than forecast. The MSCI Asia Pacific Index dropped 1.8% as of 1:20pm in Tokyo, paring the weekly advance and set for its biggest drop since May the 23rd.

EUROPEAN benchmark indices are expected to drop today, as they track the sharp losses on Wall Street on mounting fears that the U.S. economic recovery is losing steam. The euro zones debt crisis was also at the forefront of investor’s minds yesterday, after ECB Executive board member Jeurgen Stark was quoted as saying that a rollover of Greek bonds that does not constitute a default may be a way of involving the private sector in tackling the country’s debt problems.

CURRENCIES:

STERLING dived against the dollar and euro yesterday after UK manufacturing data came in much weaker than expected bolstering the view a struggling economy will keep UK interest rates at record lows until next year.

THE YEN declined against a majority of its most-traded counterparts before Japanese Prime Minister Naoto Kan faces a no-confidence vote that may have enough support to pass.

ENERGY:

OIL declined for a second day after reports showed U.S. crude supplies rose, companies added fewer jobs than forecast and global manufacturing slowed stoking speculation fuel demand may falter. Futures fell as much as 0.7% after the biggest drop in 3 weeks yesterday.

COMMODITIES:

THAI RICE prices, a benchmark for Asia, may jump 50% by the end of the year under a plan, by the party favoured to win the July 3rd election, to buy grain directly from farmers, according to millers and traders. The Pheu Thai party plans to reinstate a policy to buy unmilled rice at 15,000 baht ($496) per metric ton, twice the current level. That would raise the costs for exporters and boost the price of shipments to about $750 per ton from $500.

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