Risks Jump On Spain's EUR 100b Bank Rescue, Dollar Pressured

Risk markets opened the week strongly on news that Spain finally surrendered and called for regional help for its banking sector over the weekend. An agreement was reached which would provide Spain as much as EUR 100b of funds to help its troubled banks. That's more than double of IMF's estimation of EUR 37b as provided earlier this month. Fitch estimated last week that a total of EUR 60b is needed and EUR 100b in severe stress scenario. Indeed, Spanish Economy Minister de Guindos noted that the amount includes "safety margin." So the agreed EUR 100b is also seen as enough in the worst cases. Asian equities are broadly higher on the news with Nikkei up nearly 2% while Hong Kong HSI is also up 2%. The dollar is broadly pressured with EUR/USD trading above last week's high of 1.2624. Also, EUR/GBP took out last week's high of 0.8139 too.

Under the program, the EUR 100b bailout loan will be channeled through FROB, Spain's Fund for Orderly Bank Restructuring, and be extended to banks. FROB will act as "agent of Spanish government" and retails full responsibly of the assistance, with an MOU. Interest rate is believed to be at 3% even though de Guindos didn't comment and just said it's "very favorable." And, de Guindos emphasized that only banks with troubles will get the fund, not all. It's not decided on whether the fund will come from EFSF or ESM yet. IMF's role is for supporting the implementation and monitoring only. The terms for the bailout will be "focused on specific reforms targeting the financial sector" rather than broad based austerities. Meanwhile, eurogroup emphasized monitoring of Spain's structural reforms in parallel with the aid.

While risk sentiments were generally lifted by the news, the overall picture is not all positive. Firstly, the deal will put some stress on Spain's effort in deficit cut as the loan interest would have an impact. Secondly, Spanish prime minister Rajoy somewhat declared victory as that's a bailout for the bailouts, but but a bailout of the country. But it's uncertain whether Spain, as a country, will need assistance eventually. Thirdly, as situation in Spain is temporarily solved for new, focus will turn to Italy, it's not ending with Spain. Fourthly, Greece will finally have it's election again this Sunday on June 17 and that could decide whether it will stay in euro, or might repeat the uncertain situation in May. Sounds like we said nothing about Greece. But yes, after a month, Greece could have done just nothing.

China's trade data released today also give some support to investors sentiments. Export rose 15.3% yoy in May, more than double of expectation of 6.9% yoy and compared to April's just 4.9% yoy. Import rose 12.7% yoy, comparing with expectation of 3.0% yoy and April's mere 0.3% yoy. However, China's commerce minister warned that trade situation will "remain severe in the second half of the year and can meet full-year trade targets with luck." Inflation data from China saw CPI slowed more than expected to 3% yoy in May, lowest in two years. PPI also dropped more than expected by -1.4% yoy. Cooler inflation should give leeway for China to add more stimulus.

Other data released saw Japan's BSL large manufacturing index dropped to -5.7 in Q2, M2 + CD rose 2.1% yoy in May, household confidence improved to 40.7 in May.