China Stimulus Hopes Dashed
The AUD and EUR reversed their gains versus their dollar in Europe as a report from the news agency Xinhua quashed expectations of fresh large-scale stimulus from China. Earlier, domestic reports had circulated suggesting that new stimulus measures were being discussed, up to the size of CNY 4trn – but these comments suggest otherwise, noting that 2012 Domestic investment projects total only 400 billion. Reuters, citing Spanish government sources said that Bankia will be recapitalised via new debt issuance, though it is unlikely to inject bonds directly into the bank. The source said Spain will likely raise the money needed for Bankia in several steps, using the bank restructuring fund and Treasury liquidity. Our rates strategists believe that this would very likely result in an increase in government issuance which will have to cope with the ongoing structural contraction in investors’ demand for Spanish sovereign and sovereign related bonds. Yesterday, Fitch warned that Eurozone sovereign ratings are not likely to see stability “anytime soon”. The agency also recommended that governments adopt growth measures as austerity “in many cases” has added downward pressure to ratings. Investor focus remains on Greece although there is still almost three weeks to go before the June 17 re-election. Despite a barrage of newspaper commentary suggesting multi-national corporations are rethinking their business interests in Greece, there was at least some news of a positive variety too – newswires reported that (1) Greek banks have finally received the promised EUR 18 bn in fresh capital and (2) that Greece still has access to a residual cash reserve which could be used to provide funds in the near future if necessary. The capital injection does allow the banks in question to return to traditional ECB funding channels at least, though there will continue to be some ongoing liquidity provision via the ELAs which is a key point of contention for the Bundesbank in particular. Our flow monitors suggest that asset managers, though still on the offer, have slowed down their pace of selling in euros but this would all prove academic if there were material developments which would point to a Greek euro exit. Overnight EURUSD traded 1.2510-1.2575 and USDJPY 79.42-79.64.
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