As London celebrates, Spain commiserates

The markets are predictably quiet today as London is out for the Jubilee Bank Holiday. But for those not watching the fly past at Buckingham Palace they had a G7 conference call to digest. It had virtually no impact on the markets, which barely budged even though there were rumours that Germany pushed Spain towards accepting a bailout. The US Treasury’s official statement post the call said that the ministers and governors reviewed “progress towards financial and fiscal union in Europe”. This is a massive leap for the currency bloc and far too big to be solved in one phone call, hence the US also noted that global authorities will monitor the situation in the Eurozone closely ahead of the G20 summit later this month in Mexico.

So the onus is now on the G20 and the EU summit at the end of this month to really make tracks and attempt to bring the sovereign debt crisis under control. Although Germany and others believe that the real cure is to stop Southern Europe from spending within its means (which is the painful adjustment that is desperately needed), the whole structure of the Eurozone needs addressing. If there was fiscal union – taxes and spending came from one central authority – then you may not get the build-up of imbalances that occurred during the past decade across the currency bloc with Germany saving too much and countries like Greece spending too much. The markets also have to do their part to heal the wounds of the sovereign debt crisis – don’t chase growth with no foresight for the potential costs involved. High growth rates in Spain and Ireland were lauded as “economic miracles” or even “tigers”, although this growth created unsustainable property bubbles. Instead, Germany was deemed a sluggish, mature economy with people unwilling to spend, albeit sustaining a good growth mix without creating bubbles.

But while the leaders of the world’s most important economies plan future meetings to shape the future of the currency bloc, Spain’s government is sounding more and more desperate. This morning the country’s Budget Minister said that he believed there was a high chance that Spain would not be able to return to the capital markets. This is concerning as Spain is planning to hold an auction on Thursday. Although Spain has pressed for European institutional help in restoring its banking sector, there has been no agreement to this from Brussels and no mention of it on the G7 call. However although the outlook for Spain looks desperate its 10-year bond yield actually fell today. While the comments from Madrid knocked risk assets from their peak earlier in the day, they started to recover post the conference call.

Market Moves

The euro had rallied yesterday and during the Asia session overnight getting as high as 1.2540 (now a tough resistance level), however a confirmation of dismal service sector PMI’s and a 1% fall in retail sales in April caused the pair to fall sharply, although 1.2420 acted as good support. The next major event for the currency bloc is tomorrow’s EC B meeting, where we don’t expect too much action. Please refer to our ECB research note for further details.

USDJPY threatened to be exciting as it tested 200-day resistance at 78.60. Above here opens the way to 79.20/30. This coincides with the overall better tone to risk (led higher by European banks and a recovery post the market fall after Friday’s weak payrolls number), which is fuelling broad-based declines in the yen crosses.

The market is likely to remain fairly range-bound as we lead up to the ECB meeting tomorrow, but without EU authorities taking concrete steps to halt this crisis then it’s hard to see how risk can sustain its rally.

Source: Forex.com

05.06.2012