Iran

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Following the morning in Europe, a generally risk-off tone is observed, with stock futures sitting just above session lows and the German Schatz auction resulting in record low yields. Some of the risk-averse moves were noted following unconfirmed market talk that a troubled Dutch housing association may be pressed towards bankruptcy, however this seems to be linked towards an article concerning the Dutch central bank probing into the sale of derivatives to the housing group Vestia. Nonetheless, the long end of the Dutch curve remains well-bid and European 10-yr government bond yield spreads are seen generally wider across the board. Releases from the UK have come under particular focus; the BoE minutes showed an alongside-expectations vote of 8-1 to keep QE on hold. With some analysts estimating more of a lean towards further asset purchases, the initial reaction was strength in the GBP currency, but countering this effect was the parallel release of UK retail sales, with the monthly reading showing the sharpest decline since January 2010. Additionally, it was noted that several members of the board saw further QE as a finely balanced decision, placing GBP/USD back on a downward trajectory and briefly below 1.5700. Elsewhere in foreign exchange, current sentiment is reflected in EUR/USD, printing multi-month lows earlier in the session of 1.2615, with the USD index at 20-month highs which in turn has weighed on commodities.

• Rajoy to ask for ECB assistance, according to reports (Sharecast)
• Bundesbank Suggests Greek Exit From Euro Would Be Manageable (Bloomberg)
• Unemployed Burn as Fed Fiddles in Debate Over Natural Rate (Bloomberg)
• Regulators, investors turn up heat over Facebook IPO (Reuters)
• China to boost private energy investment to bolster economy (Reuters)
• OECD fears euro woe to snap brittle world recovery (Reuters)
• China slowdown threatens Australia - World Bank (Herald Sun)
• Guessing game begins over next Treasury chief (Reuters)
• Italians spurn main parties in local polls (FT)
• A fragile Europe must change fast (FT)
• Spain to outline Bankia plan, may announce bailout size (Reuters)
• China Should Adjust Policy Early - Government Researcher (WSJ)

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There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply. What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat.  But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds.

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UK CPI this morning came in weaker than expected at 3.0% Y/Y in April, weighed by a fall in air fares, alcohol, clothes and sea transport, according to the ONS. The release saw aggressive selling of GBP in the currency market and has underpinned the rise in gilt futures. Alongside the 26th month low in UK CPI the IMF also issued their latest assessment on the UK economy and said further policy easing is required and that the Bank could cut its interest rate from the current 0.5% level. In other market moving news a Greek government source said that Greek banks are to receive a EUR 18bln recapitalisation down payment this Friday which initially saw the EUR and stock futures rally, however, the move was short lived as it became clear that the payment is scheduled as part of the bailout programme for Greece. Elsewhere, Fitch made a surprise announcement and downgraded the Japanese sovereign rating by two notches to A+, outlook negative. The move means Fitch has the lowest rating for Japan of the three main rating agencies so we remain vigilant for any comments from S&P and Moody’s today.

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At the beginning of the week, European equities are seen modestly higher in the major indices with underperformance noted in the peripheral markets. Markets have sought some solace in the G8 summit over the weekend, with leaders agreeing that the optimal scenario would be Greece remaining within the European Monetary Union, and have furtively agreed that further measures may be necessary to return Europe to growth. The disagreements, however, continue to rollover as leaders fail to commit to a specific growth strategy. The tentative risk sentiment is reflected in the fixed income markets, with the German Bund remaining in negative territory for much of the session and 10yr government bond yield spread between the periphery and the German benchmark tighter on the session. Touted bids by domestic accounts helped support BTPs (Italian paper), especially in the short end of the curve, where the spread between the German equivalent is trading tighter by around 3bps. From Tokyo, comments from Fed’s Lockhart have drawn attention, who commented that with the downside risks emerging from the Eurozone, it would be unwise to take QE3 off the table.

A rare moment of optimism from David Rosenberg: "I've said it once and I'll say it again. And believe me, this is no intent to wrap myself up in stars and stripes. But there is a strong possibility that I see a flicker of light come November. The U.S. has great demographics with over 80 million millennials that will power the next bull market in housing, likely three years from now. After an unprecedented two straight years of a decline in the stock of vehicles on the road, we do have pent-up demand for autos. I coined the term "manufacturing renaissance" back when I toiled for Mother Merrill and this is happening on the back of sharply improved cost competitiveness. Oil production and mining services are booming. Cheap natural gas is a boon to many industries. A boom in Chinese travel to the U.S. has triggered a secular growth phase in the tourism and leisure industry. The trend towards frugality has opened up doors for do-it-yourselfers, private labels and discounting stores.... Few folks saw it at the time. But it's worth remembering, especially now as we face this latest round of economic weakness and market turbulence. It is exactly in periods of distress that the best buying opportunities are borne...and believe it or not, when new disruptive technologies are formed to power the next sustainable bull market and economic expansion. Something tells me that we are just one recession and one last leg down in the market away from crossing over the other side of the mountain. And believe me, nobody is in a bigger hurry to get there, than yours truly. At the risk of perhaps getting too far ahead of myself, but you may end up calling me a perma-bull (at that stage, I must warn you, folks like Jim Paulsen will have thrown in the towel)."

What Could Possibly Go Wrong?

With a lack of European data, markets have remained focused on the macroeconomic issues throughout the morning. European equities have seen mixed trade this morning, starting off sharply lower following Moody’s downgrade of 16 Spanish banks late last night. Equities have been observed on a relatively upwards trend as market talk of asset reallocation into stocks from fixed-income has somewhat buoyed sentiment, however this remains unconfirmed. The news that Spanish banks are pressing regulators to reinstate a short-selling ban on domestic banking stocks has also helped keep negative sentiment towards Spanish financials at bay, with Bankia dramatically reversing recent trends and seen higher by around 25% at the midpoint of the session...The chief of the Australia and New Zealand Banking Group has said volatile conditions in global markets have caused the wholesale funding market for Australian banks to freeze, a further sign that the European turmoil is taking its toll on global markets.

• Inside J.P. Morgan's Blunder (WSJ) - Where we learn that Jamie Dimon did not inform his regulator, the Fed, where he is a board member of the massive JPM loss even as he was fully aware of the possible unlimited downside
• Euro Attempted Recovery Countered By Asian Sovereigns (MNI)
• Santander, BBVA Among Spanish Banks Downgraded by Moody’s (Bloomberg)
• Defiant Message From Greece (WSJ)
• G-8 Leaders to Discuss Oil Market as Iran Embargo Nears (Bloomberg)
• Spain hires Goldman Sachs to value Bankia (Reuters)
• China to exclude foreign firms in shale gas tender (Reuters)
• Fed Board Nominees Powell, Stein Win Senate Confirmation (Bloomberg)
• Defiant Message From Greece (WSJ)
• Fitch Cuts Greece as Leaders Spar Over Euro Membership (Bloomberg)
• Madrid Hails Moves by Regions to Cut Spending (WSJ)

 A recent IMF working paper predicts a permanent doubling of real oil prices over the coming decade.  However, the "peak oil labor" could be just enough to tip the scale for the doubling in oil price scenario a lot sooner than year 2022.

European cash equities are in the red across the board at the midway point, as the bourses fail to reverse the trend of the past few sessions. With data points very light today, participants continue to focus on the macroeconomic themes as speculation regarding a Greek exit maintains focus. A medium-term maturity Spanish bond auction slightly eased fears, selling to the top of the indicative range, however the appearance of solid demand was countered somewhat by limited supply and sharply higher yields across all three lines. Following the auction results, EUR/USD saw some modest support and the Bund exhibited slight weakness, but this was short-lived as the macroeconomic concerns took over once more. Unexpectedly, the 3-month Euribor rate fixing came in with its first increase since December last year, prompting some selling pressure on the Euribor strip. This move was retraced as it was rumoured that one bank had not submitted a rate due to the Ascension Day market holiday across certain European markets, prompting the incline.