Spain Receives Bailout Funding, Socialists Win In French Parliament
Danske Markets | Jun 11, 2012 03:31AM ET
Spanish banking sector to receive a support package from EU. Socialists win the parliamentary election in France. Chinese macro data released during the weekend were mixed but export data were a positive surprise.
Positive sentiment in Asian equity markets, weaker US dollar.
Markets Overnight
During the weekend Spain finally accepted that it needs EU support and the eurogroup released a statement that the EU is ready to back the Spanish banking sector with EUR100bn. Spain needs to send a formal request and after an assessment by the EU commission together with ECB, EBA and IMF, as well as a report from external auditors, Spain is expected to receive the money from the ESFS/ESM. See more in our Flash Comment – Spain to receive rescue package.
As with previous support packages, there are a number of unknowns/uncertainties that need to be clarified. The eurogroup states that there will be conditions attached to the support package mainly directed at the financial system in Spain but we do not know the details. On top of this, we will have to wait for an external auditor report as well as ECB, ECB and IMF. It is uncertain whether the EUR100bn will have a preferential status over Spanish government bonds depending on whether it is EFSF or ESM that lends the money. Finally, will the rating agencies respond with further downgrades of Spanish debt as Spanish debt will rise with 10% of GDP on the back of this? What ought to be positive for Spain could in the end turn out to have a negative impact.
In France the Socialists won the first round of the parliamentary election but whether they will secure an absolute majority depends on the second run that will take place next Sunday. Hence, French president Hollande now has the support for his programme to support growth, lower unemployment, introduce pension from 60 years etc. This is expected to be financed through a reorganisation of the tax system and not through renewed borrowing.
China released a string of economic data during the weekend. The export data were much better than expected as exports rose by 15%. However, both retail sales and industrial production were below expectations supporting the need for last week’s rate cut in order to stimulate domestic demand.
There has been a positive reaction in the Asian equity markets this morning with almost all indices across the region up by 0.8% to 2%. The dollar has weakened against the euro and is up above the 126-level this morning. SEK has gained against EUR and is back below 8.90 this morning while NOK has been stable.
h3 Global Daily/h3 Focus today:With a relatively light calendar today financial markets are expected to be dominated by this weekend’s announcement of an aid package for Spain and the economic data for May released in China during the weekend. The response should be one of (some) relief. The size of the rescue package for Spain leaves a considerable recapitalization buffer if needed and while the Chinese data were mixed they were at least not as bad as feared after last week’s rate cut by the Chinese central bank. France will publish industrial production for April today and Fed members Lockhart and Williams are scheduled to speak. They are both voting members and for that reason it will be interesting to see to what degree their views have softened on the back of the weak labour market report.
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Fixed income markets: The Spanish deal was widely expected by the markets but is likely to provide some short-term relief. It is a positive that banks will be recapitalised from earmarked funds but implementation risks persist and Spanish sovereign debt will still go up. Focus will likely again turn to the Greek election on Sunday 17 June.
FX markets: The bailout of Spanish banks and better-than-feared Chinese numbers over the weekend not least after the surprise cut in Chinese official rates last week have supported the euro and cyclical currencies in general. We believe this risk-on or rather relief move has further to run today. In that respect we once again underline that the market was exceptionally short EUR/USD going into this weekend. According to the socalled CFTC or IMM data speculators added another 5% to short EUR/USD positions in the week that ended 5 June. Speculative net-shorts measured by the number of contracts are now at the highest level since at least 2007 but also new speculative shorts against AUD and NZD were added during the week. Hence, plenty of potential for further shortcovering in the FX markets today.
However, we recommend keeping tight stop/loss levels. We are fast approaching the Greek election and the Spanish banking sector bailout certainly does not solve the problems for the Spanish economy and Spanish sovereigns could easily start to suffer once again. Therefore, we recommend following Spanish government bond yields the next couple of days. They will set the direction also in the FX markets.
Core inflation has been unusually volatile over the past couple of months. This is probably due to fluctuations in airfares due to the timing of Easter and we should now see this effect phasing out and prices normalizing. We therefore estimate that inflation for May (to be published today at 10:00 CET) was more or less normal, although the annual rate is still likely to have climbed to 1.0% because prices fell abnormally in May last year. This would be marginally lower than Norges Bank's forecast in the March monetary policy report but nowhere near enough to tip the balance in favour of further rate cuts, with stronger growth, higher wage growth and a weaker krone pulling in the other direction.
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