Trade Balance

Hmmm… Should we be impressed?

European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.

• EU talks up Spanish banks package, markets skeptical (Reuters)
• China’s Import Growth Misses Estimates For June (Bloomberg)
• The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
• Draghi pledges further action if needed (FT)
• JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
• Norway's Statoil to restart production after govt stops strike (Reuters)
• Top Fed officials set table for more easing (Reuters)
• Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
• Obama Intensifies Tax Fight (WSJ)
• Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
• Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
• Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)

Not much going. Markets treading water in sync. Going RN, simply on lower levels. The calm before the Storm?

Minor data week, which will leave market action subject to jitters and rumours, technicals and charts. Tricky auctions of the week will be the one for EUR 8bn Italian bills on Thu and Italian 3 YRS to close the week on a Friday 13th (amount still open; were EUR 3bn 3s and 1.5bn 7 and 8 –year bonds last month). One will bear in mind that the holiday season, which slowly but surely starts to kick in, will further diminish what’s left of liquidity, exacerbating any given move.

• Euro zone fragmenting faster than EU can act (Reuters)
• Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms (Bloomberg)
• Eurozone crisis will last for 20 years (FT)
• Chuckie Evans: "Please suh, can I have some moah" (Reuters)
• Quote stuffing and book sales: Amazon ‘robo-pricing’ sparks fears (FT)
• Situation in Egypt getting worse by the minute: Egypt parliament set to meet, defying army (Reuters)
• Chinese goalseek-o-tron speaks: China’s inflation eased to a 29-month low (Bloomberg)
• A contrarian view: "Barclays and the BoE have probably saved the financial system" (FT)
• Flawed analysis: Dealers Declining Bernanke Twist Invitation (BBG) - Actually as shown here, ST Bond holdings have soared as dealers buy what Fed sells: more here
• Obama team targets Romney over taxes, Republicans cry foul (Reuters)
• And all shall be well: Brussels to act over Libor scandal (FT)
• Bank of England's Tucker to testify on rate rigging row (Reuters)

A preview of the key events in the coming week (which will see more Central Banks jumping on the loose bandwagon and ease, because well, that is the only ammo the academic econ Ph.D's who run the world have left) courtesy of Goldman Sachs whose Jan Hatzius is once again calling for GDP targetting, as he did back in 2011, just so Bill Dudley can at least let him have his $750 million MBS LSAP. But more on that tomorrow.

It is truly difficult to believe that social tensions may be contained indefinitely under a deteriorating economic scenario – although there is the 'frog in the pot analogy' again. There are also escape valves which surely help keep social tension from mounting such as the ongoing criminal investigation in which former Bankia chairman Rodrigo Rato and 32 members of the failed bank’s board were formally cited this week as suspects of fraud, misappropriation of funds, and the falsification of financial documents; a necessary but inconceivable turn of events compared to only two months ago. Ultimately, however, unless the long-yearned European breakthrough (which nobody has managed to properly define) occurs soon and some form of economic upturn begins to be seen as within reach, there is no reason to believe that Spain’s situation will improve over the next several months. If the summer turns out to be as “hot” as expected, Rajoy may at least have to revise his communication strategy and start facing the public. The cooling variables which currently work in favor of keeping society simmering in a state of fear rather than boiling with outrage may not hold the fire.

So where does this leave us, knowing that despite all the exuberant highs and depressed lows, we had ended the previous week pretty much in unchanged matter?

Well, after a 10-day period that had not one but 2 bail-outs announced, a EU summit that initially seemed to good to be true, results-wise, and then ended up just being that, and a triplet of Central Bank cuts cum QE supportive measures, things don’t look much better…

• Beggars can't be choosers after all: Greece Drops Demand to Ease Bailout Terms (FT)
• It took journalists 4 years to get that under ZIRP all banks have to be hedge funds: US Banks Taking Risks in Search of Yield (FT)
• Made-In-London Scandals Risk City Reputation As Money Center (Bloomberg)
• Merkel Approval Rises to Highest Since 2009 After EU Summit (Bloomberg)
• Judge orders JPMorgan to explain withholding emails (Reuters)
• U.S. hiring seen stuck in low gear in June (Reuters)
• Germans Urged to Block Merkel on Integration (WSJ)
• Crony Capitalism Rules: Countrywide used VIP program to sway Congress (Reuters)
• Barclays’ US Deal Rewrites Libor Process (FT)
• Cyprus Juggles EU and Russian Support (FT)
• Delay Seen (Again) For New Rules on Accounting (WSJ)
• Lagarde Says IMF to Cut Growth Outlook as Global Economy Weakens (Bloomberg)

• Funny WSJ headline: Berlin Blinks on Shared Debt  (WSJ)... sure: if XO hits 1000 bps tomorrow, Eurobonds in 2 days
• Barclays $451 Million Libor Fine Paves Way for Competitors (Bloomberg)
• Fed officials differ on whether more easing needed (Reuters)
• China Local Government Finances Are Unsustainable, Auditor Says (Bloomberg)
• Just because the NYT is not enough, Krugman has now metastasized to the FT: A manifesto for economic sense (FT)
• Merkel dubs quick bond solutions ‘eyewash’ (FT)
• Yuan trade settlements encouraged in SAR (China Daily)
• Katrina Comeback Makes New Orleans Fastest-Growing City (Bloomberg)
• European Leaders Seek to Overcome Divisions at Summit (Bloomberg)

All you can read.

• Greece is Relevant: Central Banks Warn Greek-Led Euro Stress Threatens World (Bloomberg)
• Greece is very Relevant: World Economies Prepare for Panic After Greek Polls (Reuters)
• ECB's Draghi flags euro risks, spurs rate cut talk (Reuters)
• And as usual, beggars can be choosers... Hollande Urges Common Euro Debt, Greater ECB Role (Reuters)
• Wait and flee - Electoral uncertainty sends the economy into suspended animation (Economist)
• The EU Smiled While Spain’s Banks Cooked the Books (Bloomberg)
• Osborne’s £100bn Plan for UK Economy (FT)
• Two Cheers for Britain’s Bank Reform Plans: Martin Wolf (FT)
• BOJ Holds Policy Ahead of Greek Vote with Eye on Global Markets (Bloomberg)
• China Hits Back at U.S. Criticisms at WTO (Reuters)

European equities in both the futures and the cash markets are making significant gains after a mornings’ trade, with financials, particularly in the periphery, leading the way higher following the weekend reports of the Eurogroup confirming aid for the Spanish banking sector. With data remaining light throughout the day, its likely investors will remain focused on the macro-picture, seeing some relief as the Spanish financials look to be recapitalized. At the open, risk sentiment was clear, with EUR/USD opening in the mid-1.2600’s, and peripheral government bond yield spreads against the German bund significantly tighter. In the past few hours, these positions have unwound somewhat, with EUR/USD breaking comfortably back below 1.2600 and the Spanish 10-yr yield spread moving through unchanged and on a widening trend across the last hour or so against its German counterpart, and the yield failing to break below the 6% mark.

The past week was dominated by the Eurogroup statement over the weekend that Spain will seek financial support for its banks. According to the statement, Spain intends to make a formal request soon, with financial assistance expected to be around EUR100 bn and to come from the EFSF or ESM. Aid will be channeled through the FROB, and will increase the debt burden of the Spanish sovereign. There will be no macro or fiscal conditionality as in the bailouts of Greece, Ireland and Portugal, but only on bank sector restructuring. That said, there will be monitoring of the deficit and structural reforms as part of this bailout, though no conditionality, and the IMF is also invited to monitor progress under the program. Separately, the week also saw lots of commentary out of the Fed, including from Chairman Bernanke and Vice Chair Yellen. Looking to the week ahead, the key question for us is where to harvest excessive risk premia, bearing in mind that the Greek elections are around the corner.. In terms of policy talk and data, for the former Fed chatter ends on Tuesday when the blackout period begins ahead of the FOMC on June 19/20. For the latter, US retail sales and industrial production will be important to watch as we head into the FOMC next week.