After the agreement out of the EU summit that will have EFSF/ESM directly recapitalize Spanish banks, sentiment took a turn towards significant improvement. EU sovereign spreads to bunds are moderately to extremely tighter, while the Euro Stoxx 50 as well as S&P 500 futures are considerably in the green. Most commodities are also moving higher this morning, led by WTI Crude up +3% on the day, while the USD and JPY underperform in overnight price action versus most peers.
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Sentiment is fairly negative before today’s EU summit, and after poor economic data was released in Europe. Spanish 10yr yields hit 7% again overnight, and most euro-area equity indices are in the red on the day. U.S. Treasuries are gaining, led by 7yr notes, before the Supreme Court today issues its ruling on President Obama’s Patient Protection and Affordable Care Act.
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Sentiment is fairly bright this morning with stocks in both Europe and Asia climbing for the first time in five days as investors speculate that China will commit to further easing and after Italian bond prices gained after a successful debt auction. Italian and Spanish borrowing costs are lower overnight, even after Italian yields rose at an auction of six-month bills, and stock indices are higher with the Euro Stoxx 50 up +0.79% led higher by Italy’s FTSE MIB up +1.24%. S&P 500 futures are up +0.212%, and the EUR/USD cross is consolidating in a downtrend ahead of the EU summit this week.
Bank of International Settlements Warns Central Banks
According to the Bank of International Settlements (BIS), the hard-won credibility and independence of the world’s largest central banks are under threat by the growing dependence on easy and abundant supplies of cash made available by governments and financial markets. “Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed,” BIS said, warning that this “intense pressure puts at risk the central banks’ price stability objective, their credibility and, ultimately, their independence.”
“A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they can actually deliver. This would make the eventual exit from monetary accommodation harder and may ultimately threaten central banks’ credibility,” BIS said, adding: “If central banks’ credibility were to be eroded and inflation expectations were to pick up, it would be very difficult and costly to restore price stability, as the experience of the 1970s has shown.”
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Sentiment is optimistic this morning even as borrowing costs for Spain and Italy surged at an auction overnight, and after Moody’s downgraded 28 Spanish banks. U.S. stock futures are trading moderately higher rebounding from two-week lows, bourses in Europe are mixed with modest changes, Asian indices fell slightly, and corn hit a seven-month high. The euro depreciated nearly -0.1% to $1.2493, and Oil is trading below $80 per barrel for a fourth day in a row.
European Woes: Moody’s Downgrades 28 Spanish Banks
Spain’s largest two lenders, Banco Santander SA (now Baa2) and Banco Bilbo Vizcaya Argentaria SA (Baa3), were among the 28 banks that were included in Moody’s downgrades that came as a result of the country’s sovereign debt and souring real-estate loans. The downgrades included six banks being downgraded four levels, 10 by three grades, and the rest receiving one and two-tier cuts. The cuts come after a three-step reduction in Spain’s credit grade to Baa3, one-step above junk, in a June 13 release citing the nation’s debt, a weakening economy, and limited access to capital markets. The nation remains on review for further downgrades amid plans to borrow €100B to recapitalize their banks from EU rescue funds.
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After the review was conducted and no banks were cut more than forecast, the markets shrugged off the downgrades as yet another overhyped story of 2012. The fact that there is less uncertainty now that we know the extent of the cuts has improved investors confidence.
For now I will spare you the full rant I’ve already written (I know your time is valuable). Let’s see how today plays out and I’ll get busy writing this evening, at the latest, after I get a better feel for the markets continued reaction to the downgrades. Lets also tune in for rumors before an important upcoming EU Summit.
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