- No big news from the G20 summit. Talks center on euro crisis response with no signs of Germany giving in to pressure. Merkel stays tough on Greece.
- Relief following the Greek election was short-lived as focus shifted to Spain where bond yields reached a 16-year high yesterday.
- US and German equities closed higher yesterday while Southern Europe took a beating. Stock markets are losing slightly in Asia.
- Focus today on G20 statement, Spanish bond markets and ZEW index.
There has been no big news from the G20 summit in Mexico. Focus is clearly on the euro debt crisis and the response from EU leaders, not least Germany that is seen as holding the key to the necessary measures – see FT. But there are no signs that Germany is giving in to pressure for eurobonds or any kind of mutualization of debt at this stage. Germany's leader Angela Merkel has said she'll defend her policies with “good arguments.” Speaking at a news conference Merkel also continued a tough stance on Greece saying “there won't be any changes to the memorandum” – see WSJ.
Brazil said BRIC’s countries will announce contributions to the IMF fund. This was expected after IMF in April said it had received pledges of an increase in the funds of a total of USD 430bn – see Bloomberg. We do not expect the G20 meeting to present any new measures or solutions but only to state intentions to ease the euro crisis and support growth worldwide.
Talks continue in Greece to form a government – see FT. The New Democracy leader Antonis Samaras' chances of forming a viable government improved yesterday when he got backing from the Pasok leader to become prime minister. Samaras has a majority with Pasok but has stated he wants a broader coalition before he continues on more painful reforms and austerity and he is likely to try and get the smaller left-wing party Dimar to join as well.
Following short-lived relief in the markets after the Greek election focus quickly shifted to Spain where data show a continued rise in the bad loans ratio from 8.37% in March to 8.72% in April. Spanish bond yields rose to a 16-year high of 7.28%.
Equity markets quickly lost ground from a strong start but both the German and the US markets managed to close in positive territory. Southern Europe, however, took a beating.Markets in Asia are slightly lower.
US bond yields have moved a couple of bp lower overnight to 1.57% on the 10-year yield. In FX markets EUR/USD has recovered a bit overnight after falling most of the
day on the Spanish tensions. Scandi crosses are broadly unchanged.
Global Daily
Focus today: Political events remain in the limelight. In Greece, New Democracy's leader Samaras has got the mandate to lead negotiations to form a new government. The process should be concluded within three days from the election - hence, the deadline is Wednesday. The two-day G20 meeting kicked off yesterday continues today. No doubt that the European debt crisis is being discussed but we do not expect any specific proposals to be presented. The eurozone countries are instead focusing on having these ready for the EU summit on 28 June.
With only tier-2 releases on the agenda markets are looking ahead to the FOMC statement and press conference tomorrow. We expect the Fed to deliver more monetary easing and strike a dovish tone in the statement (see FOMC preview - Twist and shout. For today's data releases we expect the German ZEW to decline more than consensus expectations and look for only a modest increase in US housing starts for May and an unchanged level of building permits.
Fixed income markets: The situation in Spain is getting desperate and Spanish long-term yields are now at levels where Greece, Portugal and Ireland had to accept bail-out packages from EU/IMF. However, with Spanish GDP more than twice as big as these countries combined, the risk is bigger this time and the result can have larger ramifications. It is clear to us that the ECB will have to take action sooner rather than later and the question is now whether Draghi can wait until next month before announcing additional stimulus. It still makes sense to "play it safe" as the last two risk rallies have been very short-lived and have only given the bears better entry levels. Bunds, Gilts and Treasuries remain preferred targets despite expensive levels.
FX markets: The "Greek" rebound proved short-lived yesterday and EUR/USD moved lower before edging back above 1.26 again overnight. With the market already very short EUR/USD we think it will be difficult for the pair to edge much lower before tomorrow's FOMC meeting, as investors are likely to think twice about adding to short positions before a potential Fed easing announcement. We still expect to see EUR/USD lower over the coming months but it all depends on the relative monetary policy response between the Fed and the ECB. If the Fed surprises and delivers strong monetary easing this would qualify as a game changer and could trigger a trend reversal in EUR/USD - but it will likely take more than just soft language and an extension of Operation Twist.
Scandi Daily
We expect Swedish unemployment to remain steady at 7.8% (nsa) in May. Unemployment has been lower the first four months than last year, despite the weakening economy. The reason is probably that companies and the public sector are keen to retain their work force as there will be significant retirement in the coming years. Vacancies and lay-offs have both been improving over the past couple of months. There are, however, a few clouds to mention. May PMI and NIER business surveys suggest that employment in most sectors is slowing or even declining again. Hence, the outlook is still quite fragile.
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