headlines

• Greece reached a deal on extra tax rises and spending cuts with the EU/IMF to plug a EUR 3.8bln funding gap
• Better than expected German IFO data promoted risk-appetite, which supported EUR
• Shares in Italian banks, including Unicredit and Intesa Sanpaolo, got suspended, partly due to market talk that some Italian banks had failed stress tests
• Moody’s changed its outlook on 13 mid-sized and smaller Italian banks to negative, and warned them of a potential downgrade. However, Italian PM said Italian banks are well capitalised, and is not worried about Moody’s warning
• ECB’s Gonzalez-Paramo said the Eurozone crisis is not over and will not end soon
• Greece's PASOK lawmaker, Robopoulos, said that he may vote against the mid-term fiscal plan

Today's durable goods and second GDP revision will be largely non-market moving with all the headlines coming out of Europe and the EURUSD as is now standard.

There has been a decidedly bearish turn to risk sentiment in Europe, where the EURUSD briefly touched over 1.43 just under two hours ago, only to see virtually all the gains from the Greece "bailout acceptance" non-news wiped out, and dipping by over 100 pips in the span of a little over an hour. The reason for this dramatic change in mood is attributed to a trading halt in Italian banks UniCredit and Intesa Sanpaolo both of which tumbled by 8% earlier before being halted. Among the reasons for the plunge cited by traders are rumors for a cap increase for UniCredit due to risk of not passing the stress test. There is also speculation that there was a major selling program advertised by Goldman several minute before the Moody's headlines of putting Italian banks on downgrade review. Attached is Reuters take. Bottom line - Europe is so jittery that no matter how the Greek hole is plugged, the law of connected vessels merely will mean that vigilantes will next focus their attention to one of the next two dominoes: Spain and Italy.

A fascinating look at how US public pensions are betting their future on hedge funds...

Risk-aversion remained the dominant theme during the European session on the back of the ongoing Greek debt concern, allied with worse than expected manufacturing PMI data from core Eurozone countries like France and Germany. This resulted in weakness in European equities, which provided support to Bunds, and also observed widening of Eurozone 10-year government bond yield spreads across the board. In the forex market, strength in the USD-Index weighed upon EUR/USD and GBP/USD, whereas weakness in commodities exerted downward pressure on commodity-linked currencies. Moving into the North American open, markets look ahead to key economic data from the US in the form of jobless claims, Chicago Fed and new home sales. In fixed income, 2-, 5-, and 7-year Note refunding announcement, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Aug'21-Nov'27, with a purchase target of USD 1-1.5bln, and USD 7bln 30-year TIPS auction are also scheduled for later.

• Overnight the Greek government passed through a crucial confidence vote, however risk-aversion remained the dominant theme today as markets look ahead to next week when Parliament discusses the country's medium-term fiscal plan
• A German government source said that the finance ministry will hold talks today on working group level with banks and insurers over private creditor contributions for Greece
• BoE’s June meeting minutes revealed that some members think it is possible that more QE might be warranted if downside risks materialise

'And don't spend your time lookin' around...for something you want that can't be found'

Anticipation of the Greek government passing through today's confidence vote successfully witnessed a re-emergence of risk-appetite in early European trade. This provided support to EUR during the session, witnessed strength in equities, and Eurozone 10-year government bond yield spreads narrowed across the board. However, EUR/USD did come under some pressure following much worse than expected German ZEW survey results, whereas Euribor futures received support after the ECB allotted higher than expected amount in its weekly refinancing operation. In other news, GBP weakened following dovish comments from BoE's Fisher, who said that further quantitative easing is still an option. Moving forward, markets look ahead to existing home sales data, allied with API inventories figures from the US later. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16-May'18, with a purchase target of USD 4-5bln is scheduled for later in the session. Moreover, any comments pertaining to the Greek debt situation or the vote of confidence will be keenly watched.

According to flashing headlines, the CDO better known as the European Financial Stability Fund will be increased to guarantee €780 billion in the future, up from €440 billion currently (the same EFSF which currently sees Greece, which has no money left at all, guaranteeing €12.4 billion of European bailouts). This was largely expected previously as many had noted that the EFSF in its current form is insufficient to cover the liabilities of Spain once the country is swept away to the Greek insolvency tsunami. Alas, for the EURUSD which is seeing this as good news, and has surged on the announcement, this development actually means that Europe is taking proactive steps to fund Spain imminently when the house of cards start falling potentially as soon as Tuesday night. This is nothing but a Spain, and then Italy, backstop. However, for Italy to be covered, expect the total covered amount to be €1. 5 trillion. Did the Eurozone just blink?

Risk-appetite, which emerged last Friday, couldn’t sustain its momentum today after Eurozone finance ministers decided to delay any final decision on a new Greek rescue package till July. The decision led to a re-emergence of risk-aversion, which provided support to the USD-Index and in turn weighed on EUR/USD and GBP/USD. The ongoing Greek debt concerns once again weighed on equities, with particular underperformance seen in financials, which underpinned the strength in Bunds. Allied to this, Eurozone peripheral 10-year government bond yield spreads widened led by the Greek/German spread.

Goldman Sachs summarizes the key events in what promises to be a most exciting week: "The Eurogroup Finance Ministers are meeting Sunday night and Monday (June 19-20), while a G7 conference call on Greece is scheduled for Sunday night as well. Germany has already softened its position regarding private sector participation in a second Greek support package. More headlines with respect to the Greece rescue can be expected in the coming days. The upcoming week will also be marked by the EU summit of Heads of State towards the end of the week. Beyond Greece the two key events are the FOMC meeting and press conference, which will be interesting, given the Fed currently faces a challenging deterioration in the growth-inflation trade-off. Finally, cyclical data disappointed last week, further adding evidence of a "soft patch" with the Philly Fed and the U of Michigan consumer confidence reports printing below consensus. Next week, we will find out whether European survey data and US durable goods orders confirm this trend of cyclical deceleration or whether they point to cyclical divergence across the Atlantic."

Good thing the media is in agreement...

Color me disappointed.

• Market talk that a new Greek aid package could be worth as much as EUR 150bln against a previous estimate of EUR 120bln
• German Chancellor Merkel and French President Sarkozy demonstrated a united front in their approach to tackle the Greek problem
• German chancellor Merkel said she wants involvement of private creditors on a voluntary basis, and wants to work with the ECB on investors’ role in Greece
• French President Sarkozy said that we have found an agreement on the private sector involvement on Greece, in line with the Vienna initiative

We won't bore readers with the Fed's balance sheet: yes, it is at a new record, and will be at a new record until the week of July 7. Which sure makes for click inducing headlines week after week. It will make for even more headlines after the announcement of QE3 when the same meme will be abused for another 1.5 years, at which point everyone will be so habituated to the idea of "record" anything, not to mention a record low dollar, that the Fed's mission will be complete. There are two things that do need noting however: FX swap lines were not used in the past week, although they will see about a trillion worth of use when Greece defaults, and discount window borrowings jumped to the third highest in 2011, or by 25% W/W (to $91 million, and by 62.5% in the Primary credit facility), another number which will shortly surge. Yet the most notable number, or as the case may be, chart, is as usual the Adjusted Monetary Base, which continues to track the asset side of the Fed's balance sheet well into the stratosphere, and is up by 20% YTD. There is about another $80 billion left on this number before it tops out. What is disturbing however, is that despite the ongoing rise in the AMB, coupled with an actual decline of $100 billion in excess reserves in the past week to $1.57 trillion, the market continues to trickle lower. What happens when the incremental additions to the AMB and to reserves end in precisely 24 days?