Bears have overpowered the bulls once again, underpinning the persisting concerns about the future of the euro zone. Toward the end of the session, stock markets have been helped by decent US economic data, with the NAHB housing report registering a one point gain to 29 in June. However, US stock markets have ignored the positive release, as euro zone concerns dominate. The weakness on Wall Street has placed pressure on European markets as a result.

Although markets earlier in the morning cheered the pro-bailout Greek election win over the weekend, worries about the implementation on a workable plan with a coalition government that can agree on reforms and austerity is eating away at the market confidence at the moment. Though a global crisis has been averted for now, Greece’s underlying economic problems will continue to rattle market sentiment in the near term. There remains a long hard road full of speed bumps for Greece, and signs of collective political efforts will be the key to building optimism over the country’s future.

As such, nerves will continue to build ahead of the key Eurogroup meeting at the end of June, where policy makers will be under pressure to work on solutions to tame the contagion of the debt crisis spreading to the core and work with Greece on measures to stimulate economic growth.

The lack of clarity so far by EU leaders on the medium term solution for the euro zone has placed considerable pressure on Spanish and Italian 10-year bond yields, which remain at crisis levels. Despite last week’s Spanish bank bailout, concerns grow over the country’s ability to clean up its toxic banking system. The worry for markets is that, if Spain is unable to address its banking sector, the ECB will have to step in and again look at unorthodox measures such as the Long Term Refinancing Operation, in order to show its commitment in protecting the euro zone economy from disaster.

Data today showed the ECB has not bought any new EMU bonds via the Securities Market Programme. This programme has been at a halt over the past few months, as the ECB looks at the effects of the recent LTRO measures. However, with rising yields for Spain and Italy, the ECB’s role in the crisis will again come under fire. Looking at Tuesday’s session, attention will be on Spain testing the debt markets again by selling 12-month and 18-month Treasury Bills. The data agenda also appears to be rather more eventful than today’s economic agenda, with French business confidence, German ZEW survey and UK CPI being a highlight in European trade.

This week’s G-20 meeting in Mexico will also garner some attention, giving European leaders a timely platform to discuss further measures to safe-guard the euro zone destruction. That said, previous meetings by world leaders have failed to deliver a material impact for markets, so the key here will be if leaders can this time make some headway in measures. On Wednesday, the FOMC’s monthly policy meeting will also be in the limelight, with Chairman Ben Bernanke’s post –rate setting press conference the highlight. The likely focus here will be signs of further QE given the rash of weak economic US data in recent weeks.

Ishaq Siddiqi
Market Strategist, ETX Capital
www.etxcapital.com