We have been warned again. Chinese and EUR rhetoric over the weekend has many taking a breather, sucking in the dismal US employment report and better preparing themselves for Chinese trade and sales data later in the week, especially after been served a weaker PPI number for June. The market is now fearing that the price fall is not just because of the base effects of lower commodity and input prices, but because final demand for China’s factory output, particularly exports, maybe declining. Premier Wen said over the weekend that downward pressure on the economy is still “relatively large†and that the government will intensify the fine-tuning of policies even as measures taken over the last three-months help stabilize this slowdown. By weeks end the market should have a better indication on how much more PBoC short term easing will be required.
The market has another EUR summit to contend with today and it’s this that’s influencing the lack of a larger market movement this morning. Europe has an “implementation problem†which has been proved by the markets reaction that followed the last EU summit where the pre-summit boost to confidence has “been evaporated as the market realizes that promises remain difficult to deliver upon.†For instance, a single bank supervisor will not be in place until mid-2013, ESM seniority is only relaxed for Spain and ESM bond buying for the peripheries is not happening any time soon. It is no wonder that the market’s patience is running thin. With little enthusiasm, participants seem to prefer to be reactionary rather than being proactive, hence the louder banter from the sidelines.
Thin trading has Spanish and Italian yields again on the back foot. Investors are weary of another disappointing summit outcome and are happy to continue to trim their holding of riskier assets. Spanish 10’s have broken that psychological +7% unsustainable level while Italian product continues to be sold off ahead of new issues later in the week. All of this will pressure Euro finance ministers today, however, current form would suggest that the meeting could trigger further risk-off moves as the limitations of what was agreed at the previous EU summit become more obvious. Already, details on the plan to inject cash into the Spanish financial system remain hazy, while Finland and the Dutch continue to express their opposition to ESM periphery bond buying. European bureaucracy is consistent, it’s exceedingly slow in implementation. Many expect that full clarity on the specifics will remain elusive for several months, or at least until the ESM treaty is ratified by 12 out of 17 states.
A recent survey posted by Spiegel online reveals that +54% of Germans think fighting for the EUR is futile if Germany has to provide billions more in aid and +49% want Greece kicked out the club, up from +46% last month. On the ground level, cutting Greece loose is a consistent theme throughout Europe while Germany remains the shoulders. Europeans do understand that Greece really is not the main concern, that would be the new Euro Cup winners, Spain. It seems that the EUR optimists again are putting too much pressure on an aggressive summit stance. The most aggressiveness anyone will see from an EUR member is when the members national issues are being tested, not the Euros. It always country first Euro second.
There is no let up in the single currency selling pressure. Attempts to lift off fresh overnight lows have been capped just above 1.23 this morning. The tech charts continue to show that prices are willing to ease again in line with the hourly studies. OANDA’s retail positions are little changed. They have been buying EUR’s, going long and refuse to pare positions on this dip. Are they an indicator of what not to do? The market does not feel it has the stamina or inclination to want to go higher. So it seems that they are playing their contrarian card. The daily trend continues to head south with further weakness expected as option expiry pressure left hand side continues to build up. EUR rallies are comfortably sold for now at least.
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