Market Update
Dollar Posts Impressive Recovery as European Rescue Hope Fades
The fallout from Spain’s bailout announcement was clearly visible across the risk spectrum, and the dollarmade no effort to hide its connection to underlying investor sentiment or the euro’s trouble. Through the opening hours of trade Monday, the weight of the announcement that European authorities would rescue its most recently troubled member (more on that below) offered some relief panicked risk aversion position. That, however, didn’t last for very long. On a high profile bounce from the 10,150-level that technical traders would recognize, saw a sharp risk aversion drive that was mirrored in dramatic form with the S&P 500. That said, we should not take this sharp turn to be an indication of momentum behind risk trends. We have a Greek election and Fed rate decision due next week –items that can truly change sentiment.
Euro: Is the Market Skeptical of Spain’s Bailout?
Back in May of 2010, European policy officials had believed that a Greek bailout would prevent further crisis from spreading to the rest of the region. Fast forward to today, in the wake of the fourth country rescue, the market doesn’t even pause to establish the merits of the effort. It is difficult to believe that direct support for Spain’s banks can stabilize the country’s own financial system much less solve the entire region’s underlying troubles. As expected heading into the weekend, Euro Zone Finance Ministers approved a request from Spain to raise funds to recapitalize the banking system. The vow alone was significant enough to offer the euro and risk trends a bounce – but follow through is something completely separate.
Skepticism surrounding this particular effort has its roots in the market’s understanding that previous rescue efforts for Greece, Ireland and Portugal have all failed to stem the contagion. So, while officials win points for acting before the situation required a last minute solution to avoid catastrophe; this policy model does not spell recovery. Even short-term hope for stability is marred by the serious lack of details in this effort. The size, administration, timing and source of the funds are all still significant holes in the effort. The ‘up to €100 billion’ program will supposedly go directly to fund banks, but that doesn’t materially make this program more effective than previous ones. Furthermore, the size of the funding and who receives them won’t be decided until after the independent review of the country’s banking sector is completed – expected supposedly on June 21. Perhaps the most damning aspect in the whole situation though is whether the funds come from the EFSF (the temporary rescue fund) or the ESM (its permanent replacement starting next month). The latter would automatically subordinate any current Spanish bond holders whereby EU countries would receive funds first in the event of a default. Of course, we only need to remember Greece’s restructuring to see the EFSF isn’t exactly safe. Nevertheless, a market sensitive to these details will start to worry not only about Spain, but potential Italy as well.
With so many questions about Spain’s rescue still lingering, there is little room to find a sudden rush of optimism and euro buying interest. This is particularly true when we recall that there is a far more immediate and binary event ahead of us: the second Greek election this weekend. In the meantime, Greece is taking a necessary gamble with a €1.25 billion auction of six-month notes in the upcoming session.
British Pound Has yet to Reap the Full Repercussions of Posen’s Dovishness
Where the Bank of England gave us little guidance after its last rate decision, we can always count on the group’s most dovish member to tell us when conditions have taken a turn for the worse. It was unusual when MPC member Posen pulled back on its calls for further stimulus a few months ago. And, after the contraction in growth and repeated concerns of the Euro Zone’s crisis impact on the UK’s financial and economic health; the dovish draw was returning. Monday, the central banker returned to his true colors when he said now was the time for the BoE and other central banks to be buying private sector assets. In the upcoming session we have factory activity and GDP estimate numbers due.
Australian Dollar Tumbles Under Risk, Chinese Data Fails to Impress
There was a round of notable Chinese data hitting the wires over the weekend, but it did little to improve the recent shine on the Aussie dollar. In the wake of the currency’s recovery last week following strong growth, improved rate prospects and China’s rate cut; the high-yield currency didn’t hesitate in its response to the risk reversal from equities Monday. The Chinese data itself was something of a mixed bag with new loans for May beating expectations (793 billion yuan) and encouraging a brighter outlook for growth while retail sales and industrial production came in under forecasts. It’s worth noting that the 12-month rate forecast is still calling for around 100 bps worth of cuts. It’s smaller, but still cuts.
Swiss Franc Find Little Relief from Euro Efforts, Market Focused on SNB
An effort to stabilize – if not improve – Europe’s financial health should theoretically relieve pressure on the EURCHF cross. That is the theory anyways. Looking at the pair itself, there was barely a hiccup in price action to the news that Spain would receive a sizable bailout. This is yet a further reflection of the market’s skepticism in the commitment and capabilities of the rescue program for this important Euro-area member. Furthermore, franc traders are preoccupied with the lead up to the SNB rate decision. Meanwhile, we have 2012 SECO growth forecasts due.
Yen Gains Traction as Risk Reverses, New BoJ Nominees Stir Policy Forecasts
In a reversal for risk trends, there is little doubt as to what the yen crosses will do. The recent rebound in the high-yield pairs was always highly sensitive to correction as the speculative element that has carried capital markets higher has banked on stability – not true recovery. In other news, Noda’s office nominated two new bank economists to fill BoJ spots. They require Diet approval, but they both have supported stimulus.
Gold Makes No Serious Moves on Another Stimulus Influx, Affections Lay Elsewhere
As if we needed another fundamental layer of support for it, gold was offer yet another sign that the Spanish bailout was not well received. The precious metal usually takes off in the face of stimulus programs as it naturally devalues a currency. That said, the metal was carving a relatively restrained range through Monday – especially when we compare it to a competitive safe haven like EURUSD.
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