Summiteers Arrive
Presidents, prime ministers, and their ministerial delegations have converged on Brussels for the two-day EU Summit which is just about to begin. Many delegates have already used the opportunity to re-state their existing positions to attending journalists. However, Finland’s Prime Minister Katainen went a step further and proposed a new policy innovation. He suggested that governments at risk of losing market access could issue covered bonds backed by government assets, and that the EFSF could stand ready to participate at these auctions if needed. Italy’s auction of 5y and 10y bonds passed without incident and yields even declined slightly afterwards. The euro did fall sharply however on low volumes, and the move coincided with a weaker than expected German employment report. This may have further raised expectations that the ECB may cut interest rates next week, especially given yesterday’s soft German inflation print. Germany’s Chancellor Merkel and French President Hollande met for a pre-summit dinner last night, but no details of what was discussed have emerged, and the focus is now squarely on the EU Summit. We still expect the EU leaders to agree on a broad framework, loosely based on EC President Van Rompuy’s report. However, this alone is unlikely to soothe investor concern given the critical details of the plan are likely to be absent and are not expected to emerge until the next Summit in the autumn, or perhaps even later in December. Market expectations are low however, so the possibility of a positive surprise cannot be ruled out – especially if any measures are introduced to ease stresses in Spain’s sovereign bond market. In the US, durable goods orders rose 1.1% m/m in May and the details of the report suggested greater resilience in activity than had prior reports. Chicago Fed President Charles Evans was on the wires, again putting forth his case for more QE, noting that the extension of ‘Operation Twist’ would only have “small effects”. We maintain, however, that the Fed is less likely to undertake further easing than other major central banks in the G10 space, underlining our generally bullish dollar view for this year.
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UBS Investment Bank