Further Soft EU Data
FX markets were fairly volatile in the European session. A series of soft growth indicators out of the Eurozone sparked a wave of selling in risk assets with EURUSD pushing towards 1.2500. However, significant short-covering and a turnaround in European equity and fixed income markets saw FX largely reverse the moves. French bonds outperformed in fixed income space, though trading was fairly illiquid. Eurozone growth data was generally soft. The EU PMI disappoints as expected: with manufacturing at 45 ( down from 45.9), services at 46.5 (down from 46.9). German data also showed signs of weakness with the IFO coming in at 106.9 vs 109.4 cons. All components of the print were week including the forward looking expectations (at 100.9).Wednesday night’s EU Summit produced no decisions on any substantive issues, as widely expected. The concept of Eurozone bonds was discussed but European Council President Van Rompuy revealed that no one called for their immediate introduction. Instead, he said these bonds would only emerge at the end of an extended process – remarks very much in tune with Germany’s long-standing position. The possibility of a pan-European deposit insurance scheme was also raised but again no decisions were taken and “various opinions” were expressed on the subject. The question of how to boost EIB capital was deferred too until the next summit on June 28-29, but the EIB was nonetheless “invited to consider” increasing its capital to help finance projects “across the EU”. On Greece, the council pledged to ensure that “European structural funds and instruments are mobilized” to boost Greece’s growth prospects but again absolutely no specifics were provided. EU Commission President Barroso summed up the situation best when he said the EU should “wait for the people of Greece to have their say on June 17”. Clearly, fresh political initiatives seem unlikely over the coming weeks – at least until the election outcome is known – and so it is hard to see the euro mounting a sustainable recovery in the meantime without help from the monetary side. On that note Spanish Prime Minister Rajoy had some policy recommendations of his own and said it is up to the ECB to make Eurozone debt sustainable by issuing guarantees – something he said could be done within 24 hours. With expectations having been managed down ahead of the summit the lack of progress only prompted some very modest euro selling afterwards. We stick to our view that further weakness has still to come through, and we keep our end-2012 EURUSD target at 1.15.
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