- ECB's Draghi provides a dose of risk appetite across the asset classes with his comments that the ECB will do whatever it takes to preserve the Euro, with additional upbeat commentary on the progress of the Eurozone.
- Italian and Spanish borrowing costs sharply decline alongside the pick-up in risk, but remain at highly elevated levels.
European markets started off on a quiet note with thin volumes as equities drifted lower and fixed income gradually made gains, however newsflow rapidly picked up as commentary from the ECB President Draghi picked up wide attention. The ECB President was very upbeat on the Eurozone’s future, commenting that the bank will do whatever is needed to preserve the Euro, fuelling the asset classes with risk appetite across the board. European equities as well as the single currency erased all losses and the Bund moved solidly into negative territory. As such, EUR/USD is seen comfortably back above 1.2200, with both the core and peripheral bourses making progress.
In the wake of the moves, attention is particularly being paid to Draghi’s comment that if monetary policy transmission is affected by government borrowing, it would come within the bank’s policy mandate. As such, much of the focus now lies firmly on next week’s policy decision from the ECB.
Coinciding with the risk-on trade, a steep decline in Spanish and Italian borrowing costs was observed, with the Spanish 10yr yield hitting multiday lows of 7.24% and the Italian counterpart hitting 6.25%. As such, both the 10yr government bond yield spreads against the German Bund are markedly tighter on the day after spending the early hours of the session in widening territory.
Looking ahead in the session, data flow is set to pick up, with the weekly US jobs data due at 1330/0730CDT and pending home sales following at 1500BST/0900CDT. Another slew of earnings is expected today, with investors eyeing ExxonMobil and Facebook as some of the largest releases today.
A Chinese statistics official has said he expects a few Reserve Requirement Ratio (RRR) cuts in the second half of this year. (Newswires) The RRR currently stands at 20%, with the previous cut coming in May of 50bps.
China is to continue proactive fiscal policy for growth. (Xinhua)
Japan's public pensions fund has said it has been selling JGBs as the number of people eligible for retirement payments increases.
The President of the Government Pension Investment Fund has commented that payouts are getting bigger than insurance revenue, so selling JGBs is necessary to raise cash, adding that the fund must now consider investing in assets beyond conventional ones. (Newswires)
According to IMF analysis, the Federal Reserve should not consider raising its inflation target, as the moves would come at the detriment of welfare costs, with the costs outweighing the benefits of having more room to cut interest rates. (Newswires)
RealtyTrac have said 59% of US metropolitan areas posted a higher rate of foreclosure activity in the first half of this year than the second half of 2011, according to its Midyear 2012 Metropolitan Foreclosure Market Report. (Newswires)
According to Fitch analysis, US prime money market fund exposures to Eurozone banks declined 33% over June and now represent approximately 8% of the total money market fund assets. The figure is a record low for the study, which began at the end of 2006. (Newswires)
BarCap month end extensions Treasury: +0.02y
EU & UK Headlines
Asset classes across Europe were relatively quiet throughout the early hours of the morning, but price action picked up alongside volumes with commentary from ECB's Draghi, speaking at the Global Investment Forum in London.
ECB's Draghi said that the bank will do whatever is needed to preserve the Euro, adding that if premia on government borrowing hurt monetary policy transmission, they would come within the bank's mandate, prompting hopes among investors ahead of next week's rate decision. In the instant reaction, EUR/USD moved up 19 pips immediately, coinciding with Bund futures falling 17 ticks and a boost in European stock futures. Five minutes after the comment, there were further bids in EUR/USD, as well as stock futures on both sides of the pond which are now all in positive territory. Of note, traders will be mindful of these comments ahead of the ECB rate decision next Thursday.
The ECB is studying implementing palliative measures to ease market pressure exerted on countries with more economic difficulties, specifically Italy and Spain, according to European sources. (El Pais) According to the report, the ECB is considering loosening the guarantees that banks are required to present in order to get financing as well as an assets purchase program. The piece adds that both measures, which were expected to be put in place in autumn, may be moved forward due to the heightening of market tensions.
According to a German Finance Ministry report, the EFSF still has EUR 236.7bln left in the EUR 440bln fund. The bailout fund has disbursed a total of EUR 100.7bln of the EUR 188.3bln earmarked for Greece, Portugal and Ireland. (Newswires)
Egan-Jones downgrades Italian sovereign rating to CCC+ from B+; on negative watch. (Newswires)
The Belgian foreign minister Reynders has said changing the ECB's mandate to allow the financing of governments should be part of the Eurozone's current debate on deeper fiscal integration. (FT-More) Germany has long objected to such proposals dubbing such measures as 'monetary financing' so any suggestions of a mandate change for the ECB would likely face stiff opposition from German leaders.
BarCap month end extensions Pan Euro Agg: +0.09y
European equities are seen firmly in the green, being led higher by the riskier financials, as appetite was boosted across the board by Draghi's upbeat Eurozone comments. European stocks were observed drifting lower alongside the EUR throughout the majority of the European morning, but with an injection of price action, moved solidly into positive territory at around 1100BST/0500CDT. US stock futures also benefited from the moves, indicating a higher open on Wall Street today.
In individual equity news, FTSE-listed Rolls-Royce are making strong gains at the midpoint of the European session after having reported a strong set of earnings premarket today. The company reported H1 underlying profit before tax of GBP 637mln, up 7%, with underlying revenues of GBP 5.8bln, up 5% and an order book seen at GBP 60.1bln, up 4%. At the midpoint of the European session, the company's shares are seen higher by over 6.5%.
In other stocks news, European carmakers are taking heavy losses at the midpoint of the European trading day, as Volkswagen reported a slowdown in earnings growth as domestic demand is dragged lower by the Eurozone headwinds. The company reported that its operating profits rose 3.4% in Q1, compared with an increase of 10% across Q1, dampening investor sentiment. The report has further weighed upon the other European carmarkers, with Peugeot also one of the worst performers today. Volkswagen and Peugeot shares have been seen lower by as much as 4% a piece today, despite the bullish European stock market overall.
EUR/USD rapidly erased all of the day's losses along with the injection of risk appetite provided by the commentary from the ECB President, pushing through 1.2200 to the upside with conviction. However, a slew of option expiries throughout the 1.21-1.2200 range could prove magnetic on the approach to the 10am (1500BST) NY cut, so some desks have noted that continued upside in the pair could be capped as European crisis concerns take focus once more.
GBP/USD reached a three day high printed at 1.5651 in the Draghi-aided incline, as a series of short squeezes, now comfortably higher than the pair was trading before yesterday's very disappointing UK GDP print. EUR/GBP is seen now trading flat on the day, with GBP outperforming the EUR against the USD, highlighting that GBP's safe haven status is still in effect despite the AAA-rating concerns after yesterday's poor growth reading.
Crude futures trade higher heading into the pit open, with markets globally having found support on comments from ECB's Draghi after he noted that the ECB will do whatever is needed to preserve the Euro.
Oil & Gas News:
- A South Korean minister said there is a high chance for Iranian crude imports to resume soon.
- The Iranian navy said the Strait of Hormuz will not be closed. Alireza Tangsiri, deputy naval commander in Iran's Revolutionary Guards, has come out and stated that while “the enemies constantly state that the Islamic Republic of Iran intends to close the Strait of Hormuz, we say that common sense does not dictate that Iran would close the Strait of Hormuz as long as it makes use of it.”
- Russia's Putin is sending more crude than ever to the West Coast, a region all but cut off from the biggest US oil production boom since the end
of the Cold War.