From Ran Squawk:
- Last week’s stress test results on European banks failed to convince market participants, as questions remained over the failure to incorporate a Greek default scenario in the tests
- Risk-aversion led equities to trade lower, whereas widening was observed in the Eurozone 10-year government bond yield spreads, particularly Italy and Spain with their respective 10-year government bond yields above the 6% level
- Strength in the USD-index weighed upon EUR/USD, GBP/USD and commodity-linked currencies
The picture portrayed by last week’s EBA’s stress test results on the European banks failed to re-ignite appetite for risk today, as many market participants questioned the validity of the tests, which ignored a potential Greek default scenario. Moreover, markets remained apprehensive about any concrete outcome from the Eurozone leaders’ summit this Thursday, and together with concern surrounding the successful passage of a raft of supply from Eurozone countries, such as Spain, later this week promoted risk-aversion. This prompted European equities to trade under pressure, led by financials, whereas marginal widening was observed in the Eurozone peripheral 10-year government bond yield spreads. Elsewhere, strength in the USD-index weighed upon EUR/USD, GBP/USD, and commodity-linked currencies.
Moving into the North American open, the economic calendar remains thin, however the TIC flows data and NAHB housing market report from the US are due later in the session. Markets also look ahead to corporate earning results from IBM, whereas in fixed-income, French T-Bill auctions are scheduled for later.
Market holiday in Japan.
China could raise interest rates in coming months as it keeps monetary policy tight to tame inflation that is running at a three-year high and is still the biggest threat to its economy. Chen Dongqi, deputy chief at the Academy of Macroeconomic Research, said he expects China’s consumer inflation to quicken to 6.5% in July from June’s three-year peak of 6.4%, before easing to 4.5% by December. (RTRS)
In other news, average new home prices in China rose 4.2% in June from a year earlier, accelerating from a rise of 4.1% in May, according to Reuters calculations from official data. (RTRS)
With time running short in US debt talks, Republican and Democratic senators sought on Sunday to craft a plan that could avert an unprecedented government default while making modest cuts in the deficit. Behind the scenes, Senate Republican leader Mitch McConnell and Senate Democratic leader Harry Reid were negotiating over a fallback plan proposed by McConnell that would allow Obama to raise the debt limit while sparing Republicans from having to vote in favour of it. (RTRS)
In related news, White House budget director Jack Lew said there was still time to clinch a deficit reduction deal, saying that he was confident that congressional leaders knew a US debt default was not an option. Elsewhere, the US Treasury repeated that it will take final extraordinary measures to extend the US borrowing authority until August 2nd. (RTRS)
Elsewhere, Goldman Sachs has lowered its US Q2 GDP forecast to 1.5% from 2% and also lowered its Q3 forecast to 2.5% from 3.25%. Goldman Sachs cited “anaemic” final sales data adding that the Fed will “undoubtedly ease” if the economy returned to recession. (Sources)
EU and UK Headlines:
Latest on the Eurozone debt crisis:
- Eurozone governments are considering a banking levy as a way to involve private creditors in a Greek rescue citing diplomatic sources. (Die Welt)
- ECB’s Trichet has said that the EFSF should be used as flexibly and effectively as possible, stating that the ECB is not in favour of the current Eurobonds proposals. (Financial Times Deutschland)
- ECB’s Bini Smaghi said that allowing the EFSF to buy back bonds from private investors would help with Europe’s debt crisis, also suggesting that Greek banks should seek mergers with foreign peers. (Vima)
- German Chancellor Merkel said that any Greek aid package must involve private investors and that restructuring might reduce the pressure for reform. (Sources)