Overnight Summary: Euro Summit Burnout

Last week, Europe was the source of transitory euphoria on some inexplicable assumption that just because the continent has run out of assets, and the ECB has no choice but to expand "eligible" collateral to include, well, everything, things are fixed and it is safe to buy. Today, it is the opposite. Go figure. Call it pre-eurosummit burnout, call it profit taking on hope and prayer, call it Brian Sack packing up his trading desk (just 5 more days to go), and handing over proper capital markets functioning to a B-grade economist, or best just call it deja vu all over again.

Rom Bank of America

Market action

Markets are selling off across the globe as investors grow cautious ahead of this week's European Union (EU) summit. In addition, Greek leaders will try to renegotiate their current bailout package to ease austerity measures and boost growth in the short term. In Asia, the worst performers were the Shanghai Composite (-1.6%), the Korean Kospi (-1.2%) and the Japanese Nikkei (-0.7%). All the other regional indices we cover also finished in the red.

In Europe, equities are selling off sharply, down 1.0% in the aggregate. The region's blue chips are getting crushed, down 1.8%. At home, futures are pointing to a 0.7% lower opening for the S&P 500. That would reverse the 0.7% gain on Friday.

In bondland, Treasuries are bid across the curve as investors seek out their safety. The 10-year yield is down 5bp to 1.63% while the long bond is trading at 2.71%. In Europe, Spain's 10-year borrowing costs jumped in early trading up 20bp to 6.46%. Italian's 10-year borrowing costs are also higher, rising 10bp to 5.88%. 

Overseas data wrap-up

On June 28 and 29, European leaders will meet for the EU Heads of State summit. European leaders will discuss options for resolving the ongoing sovereign debt and banking crises plaguing the euro area. Our European team believes there will be few concrete measures to come out of this week's summit. Agreement may be found on a package to support growth in the medium term, but nothing concrete on further euro integration. The options on the table include a roadmap towards some form of federalism, debt mutualisation, banking union, banking sector recapitalisation, extension of the permanent rescue mechanism (ESM) and the growth package. To read more details about the summit see: European Macro Watch, 21 June 2012. Also take a look at today's Wall Street Journal article, "Outlook for Euro Tied To EU Summit." 

On the data front, exports from Thailand increased 7.7% yoy in May. That was ahead of consensus expectation for a modest 0.4% increase and a reversal from last month's 3.9% contraction in Exports. Auto exports were the main growth contributor, rising 83% yoy. We suspect this is largely the result of fulfilling the backlog of orders resulting from last year's floods. Recovery from the floods and the backlog of orders make it difficult to ascertain the impact from a weaker global economy. However, the effect of the latter is likely to become more apparent during 2H when the Thai economy is expected to recover fully and the backlog of orders is filled