Risk Sentiments Weak Ahead Of EU Finance Ministers Meeting

Risk sentiments remained generally weak in Asia, following the disappointing employment from US on Friday. Asian equities are broadly lower with Nikkei down -127 pts while Hong Kong HSI is down over -300 pts at the time of writing. Investors are also cautious ahead of EU finance ministers' meeting today. The euro was broadly weak, dipping to a new two year low against dollar and hovered around record low against aussie. The dollar and yen were firm for the moment even though they both pared some on Friday's gains. The Dollar Index is staying firm above 83 level for the moment and is set to challenge near-term resistance at 83.54 soon.

The optimism from the EU summit at the end of June quickly faded and that could be clearly reflected with Spanish 10-year yield back at unsustainable 7% level, which eventually led to bailout of Greece, Ireland and Portugal. A key outcome of the EU summit was that the rescue fund ESM could be used to recapitalize Spanish banks directory, without become senior to Spain's government debt. That is, such implementation would "break the vicious circle between banks and sovereigns." However, no details were provided so far and markets have become more skeptical on the idea as everyday passes by.

A key question is that Germany has played down the prospects that Spain could get the direct banking recapitalization any time soon. Finance Minister Schaeuble insisted that there must be a "common banking supervisor" first, before using ESM to recapitalize banks. And, he said that such supervisor won't start functioning this year. Another key question is that a key question is that Finland and the Netherlands are clearly in opposition to the idea using ESM to buy bonds in the secondary markets. And, EU finance ministers are also expected to exchange views on "intention of the Greek government" and there won't be any decision on the next tranche of aid until August.

Released earlier today, China's CPI slowed more than expected to 2.2% yoy in June while PPI dropped more than expected by -2.1% yoy. It's believed that cooling inflation should give China more leeway to provide stimulus to boost the economy. And, Premier Wen warned over the weekend that China is still facing "huge pressure" on deceleration of economic growth and promoted to further "fine-tune economic policies." China has interest rates for the second time in a month last week further cuts in rates and reserve requirement ratio are expected ahead.

Elsewhere, Japan machine orders dropped -14.8% mom in May, current account surplus narrowed to JPY 0.28T in May, Eco watchers survey, current situation deteriorated to 43.8 in June. Swiss unemployment rate improved to 2.9% in June. German trade surplus narrowed to EUR 15.0b in May.