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Today's Markets - June 19, 12 (4 comments a day)

While forming a coalition government in Greece appears to be going well and is currently ahead of schedule rocketing Spanish government bond yields after bad loans hit the highest level in more than a decade are once again in the spotlight. Investors are very worried as the situation for Spain is looking increasingly dire, with Spanish 10 - year government bond yields having established themselves well above the important 7% level which for many in the long run constitutes a level at which refinancing becomes too expensive and unaffordable.

Today's Markets - June 19, 12 (4 comments a day)
9:00 A.M
Main focus this morning will be on the release of the German ZEW index, having been so far rather resilient compared to similar indices in neighbouring European countries, some weakness has started to show of late with a sharp decline expected for this month as slowing growth in China and the US in addition to a worsening European financial crisis is finally starting to bite. Furthermore there are Spanish T-Bills scheduled to be auctioned, in light of the short maturity and yields having risen sharply during the past few days, these auctions should certainly be manageable and draw sufficient demand without another major spike in yields to the upside.

Quick take on the German ZEW Index

German ZEW Index figures turned out much worse than expected today undershooting the already as very low considered estimates by a wide margin. Similar to the economies in China and the US it seems to be the case that the European financial crisis and the uncertainty that comes with it is increasingly taking a heavy toll even on countries like Germany who so far managed with strong exports to countries outside Europe to counterbalance the negative impact arising out of the European financial crisis.
The very sharp drop in the future expectations component is especially worrying and certainly doesn’t bode well for the months to come putting the still fragile recovery at an increased risk.
This set of very disappointing data might just provide the necessary catalyst for the ECB in order to undertake further growth stimulus measures.

Markus Huber - Head of German HNW Trading - ETX Capital

10:00 A.M
European stocks are to open in a soft manner Tuesday, amid lingering worries about soaring Spanish and Italian government bond yields. Weakness in Asian markets overnight adds pressure on prices, with Japan’s Nikkei and Hong Kong’s Hang Seng index both dropping around 0.4%. Hopes are growing that Greece’s New Democracy party will form a coalition with the Pasok party and bring political stability to the indebted country. A raft of economic releases will be under the microscope Tuesday, with UK CPI, Germany’s ZEW survey and US housing starts all due for release during the course of the session.

UK CPI will be in focus, a day ahead before the BOE’s meeting minutes. The central bank decided not continue its asset purchase program so the inflation numbers are worth a glance and ZEW surprising to the upside would be a welcome boost for confidence. However, market participants may choose to sit on their hands and wait for Fed Chairman Ben Bernanke to unleash his wisdom at Wednesday’s Fed policy meeting.

Stock markets are a touch firmer Tuesday, attempting to recover from yesterday’s weakness, helped by a Spanish bills auction in which the country managed to sell its targeted amount, despite the high yield. Spain sold 12-month and 18-month at the top end of its estimated range, with decent bid/cover ratios, despite yields high at 5% versus 3% in May. This indicates the indebted nation will find it even more difficult to test the debt markets as refinancing for Spain becomes too expensive and difficult. The longer Spanish yields remain high, the more unsustainable and toxic its debt will appear to markets, placing it firmly on the bailout list.

For now, in the face of such rapid economic deterioration, markets appear to be comforted that Spain has managed to test the debt market. Both Spain’s IBEX and Italy’s FTSE MIB index recovered from lows, together with the broader European stock markets.

Despite the uptick, uncertainties over the health of Spain and Italy hamper the markets’ enthusiasm to build risk. Elevated Spanish bond yields -- though slightly easing from previous session highs-- continues to sound off alarm bells. A delay in the deadline for a group of auditors who will compile full reports on the capital needs of Spain’s toxic banking system further underpinned the rumblings in the country’s financial sector. The attention will now be on Spain’s government bond sale on Thursday.

Turning to Greece, discussions between the New Democracy and Pasok parties to form a coalition government to agree on viable reforms and growth measures are in focus. Yesterday’s short-lived rally following the weekend’s pro-bailout win for Greece served to remind investors that Greece is on a long road of hardship and speed bumps which could threaten to derail any political stability and economic recovery. A new coalition government is due to be formed later this week, and will ask its international creditors for an additional two years to meet fiscal targets, which if approved, should offer Greece the additional headroom in needs in order to sort out its economic mess.

This puts the spotlight on G-20 leaders who are in the second day of discussions in Mexico, but moreover, on EU leaders who will meet at the end of this month for a highly anticipated Eurogroup meeting where Greece and Spain will be on the top of the agenda. Eyes will also be on central banks, with the BOE’s meeting minutes due Wednesday, and the Fed’s policy meeting also due later that day. Signs of further stimulus measures by both central banks should perk up the markets’ ears, and the raft of weak data from both the UK and US have raised hopes for more stimulus.

Economic data released in Europe so far has been grim, painting bleak of the German economy, the largest economy in the euro zone. The worse than expected ZEW Index figures undershot the already softer estimates by a wide margin. Similar to the economies in China and the US, it seems to be the case that the European financial crisis and the uncertainty that comes with it, is increasingly taking a heavy toll even on countries like Germany who so far managed with strong exports to countries outside Europe to counterbalance the negative impact arising out of the European financial crisis.

Looking ahead at the US session, ETX Capital currently calls the DJIA up around 21 points and the S&P 500 index higher by just 3 points. The focus will be on the start of the Fed’s two day policy meeting, with a rate announcement due Wednesday. On the economic agenda, eyes will be on US housing starts, due around 1230 GMT.

4:00 P.M

ETX Capital Afternoon Market Comment - Stocks Perk Up; Eyes On Fed

Yields on 10-year Spanish and Italian bonds have eased from previous session highs, lifting stocks on both sides of the Atlantic. By 1400 GMT, the UK’s FTSE 100 was up around 73 points, while Germany’s DAX was higher by 69 points – both indices trading near the highs of the day. Italy’s FTSE MIB and Spain’s IBEX-35 both also rose sharply. On Wall Street, the Dow Jones Index was up around 56 points. And, in a sign that risk was firmly back on the table, “safe haven” assets such as the June German bunds contract pushed declined sharply.

Tuesday’s respite followed news that Spain was able to sell T-bills at the upper end of its target, despite higher borrowing costs shooting up around 5% from 3% in May.

The sustained high yields on Spanish bonds however remain a considerable concern for markets. If the Spanish government fails to address the country’s economic crisis, like Greece, sky high borrowing rates could eventually force Spain into a full sovereign bailout. A Spanish bailout would mark a disastrous escalation of the euro crisis, threatening Italy and core euro zone nations such as France and even powerhouse Germany.

As such, hopes are growing that the ECB will come to the rescue once again and pump more cheap money into the financial system in the form of LTRO part 3. It remains to be seen if the ECB will act at this point, but an escalation of the crisis will leave the central bank no choice but to arrest a catastrophe in the banking system. For now, the focus is on the start of the Fed’s two-day policy meeting, with a rate announcement due Wednesday, followed by Chairman Bernanke’s press conference.

Expectations for a change in rates have been mixed so far. Judging by the deterioration in US economic data of late - particularly the lack of momentum in the labour market – noises surrounding further stimulus measures have gained traction. Released earlier Tuesday, US housing starts data painted a mixed picture, with home building slowing in May, but new permits reaching their highest level since 2008. The US market however has taken the release in its stride, encouraged by decent gains in the European trading session.

Ishaq Siddiqi
Market Strategist, ETX Capital

5:00 P.M

A very choppy day, where a nervous and confused market test both ends of the range parameters i.e 1.2570 to 1.2670...

Euro opened up under pressure as concerns about Greece’s ability to cobble together some sort of Government allied to woes over Italian and Spanish yields dominate. Throw in to the mix some confusion over German court comments re the ESM and the market ran for cover and for Dollars!

However the Dollar gave back some gains aiding the Euros recovery as Spain met its maximum target in today's bill auctions (despite borrowing costs soaring) The benchmark 10 year yield retreated mildly but stayed above 7% unsustainable level, whilst Italian 10 year yields dipped back below 6%.

Middle eastern name demand and the subsequent comment that the ESM would probably still be ratified by the German courts - this coupled with unconfirmed (but unlikely) reports of SMP buying of Spanish debt saw a spike to 1.2610 and an equally nasty spike back to 1.2575 on very weak German and Euro zone ZEW data - renewed Middle eastern name demand took us higher to 1.2620 where it failed initially but eventually kicking on to take out intraday stops above 1.2630. So Euro is back above 1.26 level as European indices are trading higher at the time of writing, with US futures also positive and a sudden burst of risk appetite.

In Greece, New Democracy leader Samaras enters into second day of coalition talks. Samaras pledged that "at all cost" there will be a "government of national salvation" within the deadline of his three-day mandate...when we eventually get a Government of sorts the nitty gritty of negotiating or re-negotiating with EU/IMF on the bailout terms begins in earnest and I can see that being a nice smooth process !!!!...........

All eyes appear now to be turning towards the Fed and tomorrow evening and it’s quite possible that expectations for further Fed easing can help this mini rally to sustain and likely keep the USD on the back foot for the next 24 hours.....having said that general consensus seems to be that the Fed will deliver less than is actually justifying these moves...i.e a “twist” extension is expected but whilst we will get comments suggesting more QE could be in the pipeline , it is unlikely to be right now, thus giving the FOMC the luxury of easing, albeit verbally, but crucially giving them yet more time to analyse data whilst impressing upon the markets that the upcoming elections will not interfere with any “dovish” actions they may need to undertake....although extending rate guidance beyond 2014, renewing Operation Twist or changing the target of Twist purchases from Treasuries to mortgages to leave the size of the balance sheet unchanged, should really have no medium term influence on the dollars direction.

Elsewhere in UK, headline CPI moderated to 2.8% yoy in May, hitting a 27 month low, and is back inside BoE's “target” range of 2 to 3%.. Analysts suggest that the current inflation outlook gives the BoE plenty of scope to expand thes GBP 325b asset purchase program (with some going so far to suggest there is room opening for a rate cut although a wait and see policy has been the favoured path thus far and I see no reason to change that stance just yet) although speculation of additions in the region of another GBP 50b into the quantitative easing program in the next few months seem viable.( BoE has predicted that inflation will remain above 2% throughout the year)

So the small matter of BoE minutes and employment data at 9.30 AM tomorrow morning and its over to you Mr Bernanke!

Richard Wiltshire
Chief Dealer Foreign Exchange - ETX Capital

6:00 A.M

Heading to the European market close, stocks have closed at session highs and the euro is firmer against the dollar. By contrast, German bunds are at day lows, highlighting the risk-on mood that has prevailed Tuesday. 10-year Spanish bond yields have edged lower, as the country managed to sell debt at a bills auction at the upper end of its target range with higher yields. The higher yields reflect the uncertainties surrounding the country’s bank bailout last week, prompting fears of a sovereign bailout of the indebted country. As such, much of the bullish tone has been driven by hopes of further stimulus, with calls for the ECB to restart either the SMP program [which were soon dashed] or lend more cheap money to Spanish banks.

But like Greece, concerns surrounding the economic and fiscal outlook of Spain will dominate headlines in the near term, leading the country to be on the shortlist for potential bailouts. The focus also shifts on Mr Bernanke to promote growth in the US given the slump in recent data. The Fed has kicked off its two-day policy meeting, in which signs of further QE would go down a treat with markets looking for intervention. Helpful remarks from EU leaders at the G-20 have also offered relief to markets. German Chancellor Merkel says she remains committed to resolving the euro zone crisis with consolidation and growth and said Spain should ask for a bank bailout soon. Looking to Wednesday’s session, key UK economic data will be in focus, with eyes on the labour market data and the BOE meeting minutes are due early in the session, followed by a Nores Bank rate announcement. Eyes however will be fixed on Mr. Bernanke and the Fed to see if any change in current stimulus measures will be announced.

Ishaq Siddiqi
Market Strategist - ETX Capital

Mardi 19 Juin 2012

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