France

Aside from Spain (-0.3%) and Greece (-11.8%), European equity markets are ending the week green - albeit marginally - as we can only assume the hopes and prayers of every banker are being discounted into the price of corporate liabilities (an 'event' will happen but don't worry as the ECB/Germany will cave). Corporate and financial credit markets also ended the week tighter - with financials the high beta players on the week, hugely outperforming on Tuesday but fading into today's close. Today was not a pretty end to the week in credit though as both sovereigns, corporates, financials, all peaked early in the day and pushed to near their lows by the close. Senior financial bond spreads actually closed wider on the day - at their wides - and Spanish sovereign bond spreads exploded over 35bps wider from earlier tights to end at theu widest since April 1995. Italian bond spreads also jumped 32bps wider from their morning tights but end the week -9bps and France gave back almost half its sovereign bond gains of the week today. EURUSD remains the story, breaking below 1.2500 for the first time since early July 2010 as it seems the FX markets remain much less sanguine of the endgame here than do equity markets (with sovereign credit getting closer to FX's world view and corporate credit closer to equities but fading today). Europe's VIX remains above 30% (though our VIX-V2X compression trade is performing well as US VIX elevates).

Euro bonds “didn’t find much support” at the EU conference.
                              -Jean-Claude Juncker

“A majority of European Union leaders at a Brussels summit this week backed joint euro-area bonds.”
                             -Mario  Monti

Encapsulated in these two comments is the problem that Europe is now facing. Two views, two radically different positions and no agreement on a middle ground because there is not one. Of course the periphery countries, the weaker nations want Eurobonds because it would dramatically drop their cost of funding. Of course Germany and their stronger EU countries do not want it because it would dramatically raise their cost of funding. Nations, in the end, will act in their own self-interest, this has been proven more than enough times in history, which is why I stand by my conclusion that Eurobonds will not be forthcoming regardless of the polite rhetoric attached to them.

Newedge: "Last thing I asked before I went traveling was "try not to break anything" while I’m away. I get back this morning and it looks like a bunch of teenagers have had a particularly messy drug-fuelled rave in the market’s front room. The day-on-day charts hide the roller-coaster ride we've seen on the back of the Euro. Bond markets are in lock-down awaiting what-ever-next “liquidity bomb” the authorities can find to drop. Aside from some minor bond crosses, there has been zip activity outside zero-coupon bunds, gilts and treasuries. There is more liquidity in the Atacama desert."

Forget "austerity"and political theater--the only way to truly comprehend the Eurozone is to understand the Neocolonial-Financialization Model, as that's the key dynamic of the Eurozone. In the old model of Colonialism, the colonizing power conquered or co-opted the Power Elites of the region, and proceeded to exploit the new colony's resources and labor to enrich the "center," i.e. the home empire. In Neocolonialism, the forces of financialization (debt and leverage controlled by State-approved banking cartels) are used to indenture the local Elites and populace to the banking center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core," doubly enriching the center with 1) interest and the transactional "skim" of financializing assets such as real estate, and 2) the profits made selling goods to the debtors.

In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery.

In plain terms, by mid-June, Greece could very well be controlled by an anti-austerity, anti-bailout party that wants to completely do away with the second Greek bailout (which means a potential disorderly default). This actually is the best possible outcome for Greece as the alternative is outright anarchy. Remember, Greece has gone through two Governments since its Crisis began: one was the long-standing President, the other was an EU-appointed bureaucrat.

Wondering what caused the sudden spike in the EUR? Wonder no more, for JPM's Greg Fuzesi merely put into words what everyone else had been speculating since this morning, namely more easing coming from the ECB. To wit: "We suspect the ECB's first response will be in terms of new liquidity measures. The committment to supply unlimited liquidity at the regular refis (1-week, 1-month and 3-month) expires in mid-July and an extension of this should be announced at the June meeting. Whether the ECB will also announce some LTROs (likely of maturites up to one year) at the June meeting is less clear. Its latest commentary suggested that it is not minded to move this early and that it will wait instead for the outcome of an internal review that it is conducting about the effectiveness of its policy tools so far. Waiting until July would also give the ECB a better sense of the political situation in Greece after the election. Hence, we pencil in the announcement of 1-year LTROs for the July meeting. Beyond this we expect the main refi rate to be cut 25bp at the September meeting, with the deposit facility rate remaining at 0.25%. This implies that the ECB will respond very incrementally to the current macroeconomic weakness." To summarize: help us Obi-Mario Draghi, you are our only hope.

• China Pledges More ‘Fine-Tuning’ in Support for Growth (Bloomberg)... more promises, just never any actual funding
• Spain Calls for Help to Lower Borrowing Rates (AP)
• China Is a Black Box of Misinformation (Bloomberg)
• Fed data expose US$100bn JP Morgan blunder (IFRE)
• EU Chiefs Clash on Bonds Amid Call Greece Keep Cutting (Bloomberg)
• Spain to Recapitalize Bankia in Latest Bailout (WSJ)
• The running schizo tally: EU urges Greece to stay in euro, plans for possible exit (Reuters)
• The Seeds of the EU’s Crisis Were Sown 60 Years Ago (Bloomberg)
• Fed's Bullard says orderly Greek exit possible (Reuters)
• Some Big Firms Got Facebook Warning (WSJ)
• Chesapeake Raises Big Bet in Ohio (WSJ)

If there was one catalyst for the market to be "convinced" of an imminent coordinated liquidity injection, as Zero Hedge first hinted yesterday, or simply a 25-50 bps rate cut from the ECB as some other banks are suggesting and Spain's ever more desperate Rajoy is now demanding, it was the overnight battery of European Flash PMI, all of which came abysmal, throughout Europe, the consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum." What does it all add up to? Why nothing but a massive surge in risk, as the market's entire future is now once again in the hands of the #POMOList, pardon, the central banks: unless the ECB steps up, Europe will implode due to not only political but economic tensions at this point. Sadly, as in the US, by frontrunning this event, the markets make it more improbable, thus setting itself up for an even bigger drop the next time there is no validation of an intervention rumor: after all recall what sent stocks up 1.5% yesterday - a completely false rumor of a deposit insurance proposal to come out of the European Summit. It didn't, but that didn't prevent markets to not only keep their massive end of day gains, but to add to them. it is officially: we have entered the summer doldrums, when bad is good, and horrible is miraculous.

Did France, Italy and Greece think they are the only ones who can float strawmen in the media? No. Once again, Germany shows us how it is done. From Tomorrow's edition of Deutsche Wirtschafts Nachricthen: "The Greece-exit is a done deal: According to the German economic news from financial circles EU and the ECB have abandoned the motherland of democracy as a euro member. The reason is, interestingly, not in the upcoming elections - these are basically become irrelevant. The EU has finally realized that the Greeks have not met any agreements and will not continue not to meet them. A banker: "We helped with the Toika. The help of the troika was tied to conditions. Greece has fulfilled none of the conditions, and has been for months now." So more posturing? Or is Germany truly just so sick and tired of bailing out not just Greece (which pockets between 0% and 20% of any actual bailout cash), and indirectly French banks which as of this moment are the biggest pass thru beneficiaries, and of course the ECB with its tens of billions in old par GGB holdings, that this article is, gasp, founded in reality? Is Europe approaching its own Lehman moment when everyone says "just screw it", and let the dice fall where they may? Many said Lehman could never be allowed to fail. They were wrong. Just as many are saying that Europe will never let Greece leave as the costs to the continent are just too great. Well, judging by tonight's epic fiasco of a Euro-summit, the last thing we would attribute to Europe's leaders is clear and rational thought.

If Greece leaves, Spain or Italy will definitely either default or threaten to leave (they've seen that bailouts in exchange for austerity don't work).

Whether it is the EU running to the G-20, nations in Asia, the IMF or Spain and Italy and their brethren calling for Eurobonds the distinction is easily made; you pay or you pay or you pay because I cannot. That is the cry in the wilderness as politely, very politely, quite politely everyone says, “No thank you.” The curtain is going down on the show and the normal pleas are being made to keep the spectacle in operation but the pocketbooks are closed and Germany and the rest are not going to bet the family farm when the final act draws nigh. The Elves in the boulders cackle and the “invisible people” move on and sigh as the ending of one more chapter is inscribed in the Book of Life.

With only new home sales (which we actually report as opposed to NAR goalseeked marketing materials) to hit the docket in the US, the only newsflow that matters again will be that coming out of Europe, which is holding an informal summit. As BofA reminds us, the summit was originally set up to discuss growth. Now, it is there for Grexit damage control. Today's discussions will focus on the use of existing tools for supporting short-term growth. Spain and Greece are likely to be on the agenda as well. On Greece, although discussions should focus on the pros and cons of a Greek exit, we believe there will be no communiqué other than to mention that Greece should stay in the euro area and implement the programme. On Spain, discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector, a step Germany opposed in the past. Overall, we do not expect many decisions from the summit. Rather, we expect a communiqué about what was officially discussed, and a date for a later rendezvous. In other words, "investors are likely to be let down by today's summit" (that was BofA's assessment). Also let down, were markets in the overnight session when the BOJ, contrary to some expectations, left its QE program unchanged. As usual keep an eye on headlines: record EUR interest means violent short covering squeezes if the algos sense a hint of optimism in any red flashing text (if only briefly, as the long-term outlook for the situation is quite hopeless).

Just when one thought it was safe to come out of hiding from under the school desk after the latest nuclear bomb drill (because Europe once again plans on recycling the Euro bond gambit - just like it did in 2011 - so all shall be well), here comes David Rosenberg carrying the launch codes, and setting off the mushroom cloud.

If China Backs Its Currency with Gold, It Could Have Profound Effects for Investors … and Consumers

All you need to read.