Europe news
It’s all about the EU summit today. Here’s the statement: Summit. The market is most excited about the idea that the ESM/EFSF will not be senior to other Spanish bondholders, indeed this is good news for Spanish bonds. I’m quite encouraged by the first line of the statement – leaders have realized that the deathly embrace of PIGIS banks and government was taking them both down together and they are trying to do something about that at last. This is to the benefit of countries with a large financial sector problems like Spain Ireland and Cyprus. And it’s to the benefit of PIGIS banks of course which don’t now have to rely solely on the governments of Greece (for example) to bail them out. So this is a step forward, but will it be enough to stop PIGIS citizens from taking their money out of the local banks and putting it in Germany and Switzerland? I still have plenty of doubts but today is definitely an important step in that vital direction
Markets
So the market is in jubilant mood since the statement. EUR was 1.2450 before, and shot up to 1.2628 very quickly in a thoroughly illiquid fashion. AUD and NZD have gone with it, both gaining well over a percent this morning to 1.0195 and 7980. JPY is unchanged on the day, staying between 79.14/48. Emerging currencies are all stronger. KRW and INR are the biggest movers in AXJ down to 1145.50 and 56.30 and currencies around the world have started to move early. ZAR and RUB have already gained a pct again the USD, TRY and MXN are close behind. And HUF has gained a percent against the EUR making USDHUF is today’s biggest mover ( 233.40 to 228.00.)
Stocks are all up, the Hang Seng in the lead with +2.5%. SnP futures are 17 higher to 1340: a very good sized move for Asia time.
XAU and oil are up as well after falls yesterday. Silver deserves a special mention as the 26.00/26.40 area has been a very significant low three times now and we are trying to bounce from the same area today.
Other items that were rather overshadowed today:
MYR: Petronas is buying Progress Energy for CAD 4.8bn. http://www.bloomberg.com/news/2012-06-28/petronas-agrees-to-buy-canada-s-progress-energy-for-4-7-billion.html
This may well be the reason the ringgit has not performed very well over the past week.
GBP: Bank stocks hit hard yesterday after the Barcap fine.
JPY: unemployment +4.4%, a touch lower than expected. CPI +0.2% as expected. IP -3.1% mom, slightly lower than expected.
AUD: credit growth +0.5% mom, better than some countries I can think of.
France GDP: zero as expected
German retail sales: -0.3% lower than expected.
Later: Canada GDP and US Chicago PMI and also income and spending data.
Vols
Vol curves are coming down although gamma remains bid.
Most of the market was expecting that any excitement from the EU summit would come on day 2, not late at night on day 1. But now that the important headlines are out, there are less chance of new news today. So vols are being sold off already. AUD 1m is back down to recent lows from 11.2 to 10.5 already. EUR 1m is down from 10.6 to 10.2.
However gamma is very bid in most currencies as the spot moves have been large and residual whippiness and possible continuation of the move mean that no-one wants to be short gamma. In addition market makers are short EUR gamma around these levels to hedge funds, that is keeping the EUR short dates bid, 1wk EUR is up from 11.3 yesterday to 12.3 now. But if the hedgies take profit on their positions ahead of the weekend then those contracts will come cheaper quite quick
We have important events influencing the short dates. In particular
Today: German vote on ESM
Mon: HK holiday
Tue: RBA
Wed: US holiday
Thurs: ECB
Fri: NFP
The sum of this is that the 1wk is a much better date to own than the Wednesday.
NATIXIS