EU Summit Looms As Cyprus Requests Financial Assistance

Published 06/26/2012, 04:18 AM
Updated 05/14/2017, 06:45 AM
Key News
  • EU-summit draft suggests enhanced power that should enable EU to rewrite budgets for euro area member states that violate the debt and deficit rules.
  • Cyprus applies for EFSF/ESM assistance and the Greek Finance Minister steps down due to health problems.
  • 28 Spanish Banks downgraded between 1-4 notches by Moody’s.
  • Thin global calendar with US consumer confidence as the main release.
Markets Overnight

The downbeat sentiment from the European session continued overnight, with news from the peripherals dominating the media picture. Last night Cyprus became the fifth euro area country to apply for assistance. The Cypriot government said it had “informed the appropriate European authorities” that it would request aid from the EFSF/ESM. The Cypriot economy and bank sector have suffered from the problems in Greece and the request came just a few days before the deadline to recapitalise one of the country’s largest banks, see FT. 

FT also runs a story on the potential outcome of the EU summit. According to a draft EU could enhance its power enabling it to rewrite budgets for euro area member states that violate the debt and deficit rules. This could be one approach to form a fiscal union, with EU authorities serving as a euro area Finance Ministry. Germany insists on increased control over national budgets as a condition for any pooling of member states’ credit risk. The draft also proposes the formation of a common EU bank supervisory.

The Greek Finance Minister, Vassilis Rapanos, steps down due to health problem (he had not been formally sworn in yet). Different options for his replacement have been mentioned. The new Greek government has stated that it will renegotiate the existing memorandum, which includes a two-year extension of the current budget deficit targets, see WSJ.

28 Spanish Banks were downgraded between 1-4 notches by Moody’s last night. Moody’s writes that “these actions follow the weakening of the Spanish government's creditworthiness, as captured by Moody's downgrade of Spain's government bond ratings to BAA3 from A3 on 13 June 2012,” see Moody’s press release.

Risk appetite deteriorated yesterday on negative news out of Cyprus, Greece and Spain and the negative sentiment carried over to the US equities. The S&P500 ended down 1.6%. In Asia stock indices are trading in negative territory. Nikkei is down 1.1% and Hang Seng is down 0.1%. In FX markets EUR/USD has traded sideways overnight and is broadly unchanged around 1.250 this morning.

Global Daily

Focus today:

The global calendar looks thin today with US consumer confidence as the main release. We expect consumer confidence measures to take a hit, as the European debt crisis and weakness in the labour market start to take their toll on US optimism. We have already seen a significant fall in the first release of the University of Michigan confidence indicator in June and expect the conference board figure to drop moderately to 63.5 from 64.9 today. Market attention is likely to remain on news about the outcome of
the EU summit.

Fixed income markets: Even before its start the markets are already disappointed with the outcome of the EU summit. Or so it seems when looking at yesterday’s price action. The leaked EU document and comments from Merkel choked growing market optimism that this EU meeting would be a blockbuster. Not that significant progress cannot be made at the summit but there are no quick fixes and time is running out as the recession deepens in Italy and Spain. We stick to our long-held recommendations of only being long bond markets in Germany, the US and the Nordics.

Fixed income markets: Even before its start the markets are already disappointed with the outcome of the EU summit. Or so it seems when looking at yesterday’s price action. The leaked EU document and comments from Merkel choked growing market optimism that this EU meeting would be a blockbuster. Not that significant progress cannot be made at the summit but there are no quick fixes and time is running out as the recession deepens in Italy and Spain. We stick to our long-held recommendations of only being long bond markets in Germany, the US and the Nordics.

FX markets: There are no specific events to focus on in the FX market so attention is on the EU summit later in the week. It seems that more and more market participants fear a disappointing outcome and the easy way to play that view would be to sell the euro. Hence, renewed downside risk to EUR/USD and EUR/GBP today.

Scandi Daily

Sweden:

Swedish May PPI this morning is usually not a market mover and we doubt it will be this time. We expect it to print -0.1% m/m / 0.7% y/y as a result of falling electricity prices pulling down domestic producer prices and as export companies normally cut prices in May. There will be more interesting data with bearing on GDP growth over the next couple of days, such as trade balance and retail sales. We doubt these will have weakened to an extent that will trigger a rate cut from Riksbank next week; the market is currently pricing about 13bp rate cut.

Be alert instead that the Swedish FSA may release a report this week proposing new higher risk weight to banks’ mortgage lending, from 7% towards 15%. That would raise banks’ cost and most likely hurt profitability.

There are no major market events in Scandinavia today. 
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