Overnight Developments:
- Moody’s downgrades 15 top banks including Morgan Stanley, BofA, Citigroup, RBS, Credit Suisse, UBS, BNP Paribas, Deutsche Bank.
- Likely to increase borrowing costs of these banks, and counterparties may demand more collateral.
- German IFO Business Climate index fell to 105.3 from 106.9 in May – a 2-year low.
- Spain’s audit shows bank recapitalization needs at 62 bn euros.
- US equities plunged yesterday, in the 2nd worst sell-off of the year, with Goldman Sachs putting out a recommendation to short S&P.
Key Developments This Week:
- Greece elections conclusive but any relief to markets short-lived.
- Poor macro data – China’s manufacturing PMI, Germany’s Manufacturing PMI, ZEW Economic Sentiment and IFO, US Philly Fed index point to weakness in the world’s industrial powers.
- Market anticipation of FOMC providing extra stimulus dashed – leave the door open for a move in August if data deteriorates further.
- Spain pays high interest rates at auctions, but 10-year yield falls back to 6.50% as expectation that EFSF/ESM may be used to buy bond on secondary market calms periphery.
European Pre-Summit Talks:
- Do Europeans give Greece more time to achieve its deficit-cuts? So far, Germany and other creditor nations reluctant.
- How to do a recapitalization of Spanish banking system without scaring investors away from Spanish bonds (issues of seniority and subordination)?
- A failure next week to craft a blueprint for a tighter fiscal and banking union would trigger “progressively greater speculative attacks” on Europe’s “weaker” economies. – Mario Monti
Theme of the Market:
- Macro data shows global demand faltering, trade to pull back – commodities weaker, equities which were buoyed by hope of central bank action (FOMC) gave way yesterday.
- While we have seen some improvement in Spanish yields, might just be a respite ahead of the EU Summit, and is completely fueled by anticipation that ESM will be buying bonds on secondary market.
- Much rests on the shoulders of Angela Merkel and whether Germany goes along with the demands/requests of Italy, Spain, France.
- Fed extended Operation Twist, and expectations that ECB will lower rates and that BOE will restart bond may give some underlying support to equities.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com – provider of News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
