- Angela Merkel backs Draghi’s conditionality for ECB aid and says that she is aligned with Draghi’s readiness “to do whatever it takes to preserve the euro.”
- The China Banking Regulatory Commission has told lenders to push developers for faster home sales and demand more collateral.
German chancellor Angela Merkel said late yesterday afternoon at a press conference in Canada that Mario Draghi’s vow to do all necessary to defend the euro is in line with what European leaders have been saying for a long time. She also said that ECB’s
insistence on conditionality in return for help to lower borrowing costs in indebted countries matches Germany’s priorities to end the crisis in the euro region. She also argued that the European Commission should receive stronger powers to intervene when state budgets went off course and pushed for more integration saying that “It is a question of taking the steps that weren’t taken when the currency union was created, namely a political union.”
A Medley report saying that Spain will ask for aid next month helped to fuel expectations that the ECB will soon be able to start buying Spanish government bonds in the secondary market.
Fed’s Kocherlakota said yesterday that he would not have pledged to keep the main interest rate close to zero for as long as the FOMC has.
The China Banking Regulatory Commission has told lenders to push developers for faster home sales and also demand more collateral if the banks predict the developers have difficulty repaying loans due within 12 months according to Bloomberg, reflecting that the cooling Chinese housing market is causing some concern.
In the US session equity markets rose with S&P 500 increasing 0.7% to the highest level since April 2 and Nasdaq rising 1.0%. The positive sentiment was fuelled not only by the comments from Merkel but also yesterday’s surge in building permits and upbeat quarterly results from Cisco systems added to the positive sentiment. The S&P 500 total return index climbed to a record high. In the Asian session the positive mood continued with the Nikkei index gaining 0.9%.
10 year US treasury yields increased to a three-month high yesterday as expectations of further Fed easing dampened. Overnight yields came down slightly again.
FX markets saw EUR strengthening on Merkel’s remarks pushing EUR/USD briefly above 1.2370 yesterday before retrenching slightly overnight. EUR/JPY also strengthened yesterday and has been stable overnight around 98.0, which is close to a six-week high.
The Wall Street Journal is running a story today on the strong Swedish and Norwegian currencies.
Global Daily
Focus today: The calendar is light today with the most interesting release being the US University of Michigan consumer confidence for August. It will be interesting to see if the risk of policy paralysis in Washington and the latest weeks’ increase in gasoline prices took their toll on confidence in August. Our models suggest a small rebound in confidence, after two months of consecutive declines, but risks to that forecast are skewed to the downside. In Europe we will get trade balance data for June. The trade balance turned positive back in autumn last year as imports plunged and that should be the case once again in June. As with all other euro area data, this masks wide regional differences with core countries running surpluses and periphery countries in deficits.
Fixed income markets: The bond sell-off paused a bit yesterday despite the relatively positive sentiment in the Italian and Spanish bond markets and a positive risk environment in general. Economic data out of the US were slightly disappointing on the margin but again housing remains a bright spot and this seems to get more attention from the markets. It is too early to conclude that core bond markets have stabilised, we need several more days of sideways trading or a clearer reversal. Today the price action itself will be the most important factor in a very thin day data-wise.
FX markets: The lack of key events today means that news regarding the eurozone crisis will be the main driver for the FX market. Considering that the market is still very stretched in respect of positioning (many speculative short euro positions) we see further upside for EUR/USD and EUR/GBP today. This is also in line with our forecasts that we put forward earlier this week. We forecast, among other things, that EUR/USD will rise to 1.27 in three months’ time. See FX Trends for more.
Scandi Daily
Sweden: PES unemployment data are due for release today but are highly unlikely to attract much attention. The usual pattern is that unemployment moves higher in June and falls back again in July (the numbers are not seasonally adjusted). In June this year this did not happen however (June unemployment was down a tenth to 4.4%), which makes the July forecasts (mean at 4.5%) highly uncertain. Observe that PES unemployment data only cover part of total unemployment. Official unemployment data are provided by SCB and are around 7%. 
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