Discussions Drag On
Eurozone talks continued through Tuesday but, with low expectations of chances for any breakthroughs, markets are simply choosing to ignore the talks and keeping markets range-bound. EURUSD traded 1.2282-1.2333 and USDJPY 79.22-79.59 overnight. Monday talks did provide details of support for Spain and the timescales involved – but the details will not be formally set in stone until a second meeting of finance ministers on July 20. So far, the ambition is to release EUR 30 bn to the Spanish government by the end of July via the EFSF. It seems to us that this represents only the first tranche of funds of a larger package given that sums of up to EUR 100 bn had been spoken about previously. Spain is to get 15 years to repay the loan. It was also confirmed that Spain will be granted an extra year to achieve its deficit reduction targets a proposal that had leaked onto the newswires earlier on Monday. However, even with the reprieve, growth expectations have deteriorated to the extent that investors will have a high degree of skepticism over its credibility. As such, pressure will likely grow even further on the ECB to deliver the necessary policy measures for stimulus. Overnight data prints were probably more agreeable – Chinese export numbers held up, which may be a better indicator of external conditions, did surprise to the upside with a 11.3%y/y expansion. This comes on the back of buoyant consumer credit numbers in the US which shows no retrenchment on the part of US consumption yet. Chinese Premier Wen overnight also indicated that China would do more to promote ‘reasonable’ investment growth, which should be positive for commodity markets and associated currencies. Ahead today there aren’t any major US numbers of note. Investors will likely continue to watch price action in Eurozone fixed income markets, and any commentary from the EcoFin Meetings. In addition, Germany’s Constitutional Court has begun hearings over the legality of the ESM Treaty. It is unclear at this stage how soon a verdict can be expected, although Germany’s president has refused to sign the ESM into law until the Court gives its seal of approval. Until then, the ESM cannot become operational, which means the EFSF will remain Europe’s only bailout facility for some time to come.
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UBS Investment Bank