When observing the latest "hope" based rally in the EUR last night we said that we "can't help but be extremely skeptical that this short-lived bounce will promptly reverse." Sure enough, 8 hours and 110 pips lower, this appears to have been the case driven primarily by remarks by Eurogroup president Jean-Claude Juncker and Dutch FinMin Jan Kees de Jager, both of whom said that a selective Greek default "cannot be excluded." Specifically, Dutch Finance Minister Jan Kees de Jager said on Thursday he had seen willingness at the European Central Bank (ECB) to discuss the possibility of a selective default on Greek debt. "The ECB is continuously involved in talks about private sector involvement... We have recently seen some room at the ECB to discuss this topic. This is something different than a credit event. I am talking about a selective default," De Jager told the Dutch parliament. Juncker said essentially the same thing earlier, which precipitated the EUR tumble, as this shows that with the summit starting (11 am GMT), once again nobody in Europe has any idea what they are doing. Furthermore, horrible PMI data out of Europe (following last night's Chinese contraction) overnight certainly did not help. And lastly, a Spanish auction of 10 and 15 Year bonds for which the country had to pay record prices even as the Bid To Cover barely moved (and in the case of the 10 Year declined) also took away from any risk on sentiment.
The euro dived on Thursday after Eurogroup President Jean-Claude Juncker was quoted as suggesting a selective default for Greece was possible, prompting investors who had bought the euro in anticipation of progress at a European summit to cut their positions.
A media report quoted Juncker as saying a selective default for Greece could not be excluded, and sent the euro crashing through stops at $1.4235-40, and then through further large stops below $1.4200.
"The market was long and is quite nervous. This talk of the possibility of a default and the package not being quite as neat as people expected from a banking point of view is not helping," said Sebastien Galy, FX strategist at SocGen.
"There are a tremendous amount of leaks coming through but most of the information we already know. That means technical levels are very important right now."
Fears that Greece's debt crisis will spread to bigger economies in the euro zone have kept markets on edge since early July, with yields on Italian and Spanish government bonds reaching euro zone lifetime highs above 6 percent.
Few details of the common Franco-German position were revealed, but competing proposals on how to involve the private sector and avoid triggering a Greek default have been circulating.
And while taxpayers continue to be on the hook , it took about 12 hours for the proposal to tax banks to cover the cost of the bailout to be promptly swept away:
Sources told Reuters on Thursday that a proposal for a banking tax to cover the cost of the bailout had been ruled out.
There is, of course, hope:
Market players said with the market now short ahead of the summit, there was potential for the euro to get a better bid in reaction to any news of progress from the summit, but the euro remained vulnerable to a selloff if the details failed to convince investors.
"Anything that comes out needs to be really convincing to limit the risk of contagion to Italy and Spain which has materialised in the last few weeks," said Derek Halpenny, currency strategist at Bank of Tokyo-Mitsubishi UFJ.
Elsewhere, German PMI came at 52.1 on consensus of 54.1 as Germany is slipping dangerously close to following China into contraction. This was followed by weak Euroland PMIs across the board. Per Goldman Sachs:
A clear loss of momentum
- The manufacturing PMI stood at 50.4 in July after 52.0 in June, while the services PMI declined to 51.4 after 53.7. The composite PMI is now at an index level of 50.8 after 53.3.
Bottom line: Weak headline figures with the forward looking parts of the surveys even weaker. Current level of the PMIs are now consistent with growth of around 0.2%/0.3%qoq at the beginning of Q3.
The services and manufacturing PMI both came in weaker than expected and the downward trend seen since March continues in both cases. The 'new orders' and 'new business' sub indices of the surveys also recorded another decline, pointing to further weakness ahead.
And completing the trifecta of data pushing the EUR lower was the Spanish bond auction. The results:
- 10-yr auc avg yld 5.896% vs 5.352%, bid/cover 1.90 vs 2.13
- 15-yr auc avg yld 6.191% vs 6.002%, bid/cover 2.08 vs 1.97
More from Reuters on why this indicates that Spain will soon follow Italy into austerity:
Spain paid euro-era record high rates to sell two long-term bonds on Thursday before European leaders meet to try and put a line under a debt crisis that threatens to tear into the bloc's larger periphery countries.
Spain sold 1.8 billion euros ($2.6 billion)of a 10-year bond, and 814 million euros of a 15-year bond, at the top of a low Treasury target of 1.75 billion to 2.75 billion euros.
But fears that Spain could be next to sink into a debt crisis that has already seen pushed three euro zone countries into bailouts forced the Treasury to pay hefty yields to investors.
European leaders will meet later to agree on a second rescue package for Greece and also other measures aimed at stopping the rot spreading further.
"In the long run, these are pretty punitive funding levels for Spain," said Marc Ostwald, strategist at Monument Securities, who said the auctions had at least gone reasonably well.
Analysts warn that such rates will not be sustainable for Spain over a long period, and one said if the rate on the 10-year bond went much higher it would spell trouble.
"If it gets closer to 7 percent things can turn very ugly," said a director at a major bank with links to the Treasury.
All the remains is for DC to announce that there is actually no debt deal in DC, and this week's hope-based rally will be completely destroyed.