EU Market Update: Chancellor Merkel comments on 'conditionality' tempers some of the initial optimism on EU Roadmap


Economic Data

- (RU) Russia Narrow Money Supply w/e Jun 25th (RUB): 7.14T v 7.13T prior

- (FR) France Q1 Final Gross Domestic Product Q/Q: 0.0% v 0.0%e; Y/Y: 0.3% v 0.3%e

- (DE) Germany May Retail Sales M/M: -0.3% v +0.2%e; Y/Y: -1.1% v +1.9%e

- (FI) Finland Apr Final Trade Balance: -€103M v -€80M prelim

- (ZA) South Africa May Private Sector Credit Y/Y: 8.3% v 8.0%e; M3 Money Supply Y/Y: 5.5% v 6.2%e

- (HU) Hungary Q1 Current Account: €186M v €120Me

- (FR) France May Producer Prices M/M: -1.0% v -0.5%e; Y/Y: 2.2% v 2.7%e

- (FR) France May Consumer Spending M/M: 0.4% v 0.0%e; Y/Y: 0.6% v 0.1%e

- (HU) Hungary May Producer Prices M/M: 0.8% v 0.3% prior; Y/Y: 7.8% v 7.0%e

- (CH) Swiss Jun KOF Swiss Leading Indicator: 1.16 v 0.78e

- (TR) Turkey May Trade Balance: -$8.6B v -$8.0Be

- (DK) Denmark Q1 Final GDP Q/Q: 0.4% v 0.3% prelim; Y/Y: 0.3% v 0.2% prelim

- (AT) Austria May Producer Price Index M/M: -0.3% v +0.2% prior; Y/Y: 0.6 v 1.1% prior

- (SE) Sweden May Household Lending Y/Y: 4.6% v 4.7%e

- (SE) Sweden Apr Non-Manual Workers Wages Y/Y: 2.3 v 2.6% prior

- (TH) Thailand May Current Account Balance: -$1.5B v -$0.9Be; Total Trade Account Balance: +$574M v -$734M prior; Overall Trade Balance: -$2.8B v -$1.0B prior

- (TH) Thailand May Business Sentiment Index: 53.8 v 47.7 prior

- (ES) Spain Apr Current Account: -€1.7B v -€3.2B prior

- (CZ) Czech May Money Supply Y/Y: 6.1% v 6.5% prior

- (EU) Euro Zone May M3 Money Supply Y/Y: 2.9% v 2.3%e; M3 3-Month Avg: 2.8% v 2.6%e

- (NO) Norway May Retail sales Volume M/M: 1.6% v 0.5%e; Y/Y: 4.2% v 3.6%e

- (UK) Apr Index of Services M/M: 0.0% v 0.0%e; 3M/3M: 0.0% v -0.2%e

- (HK) Hong Kong May M3 Money Supply Y/Y: 4.5% v 5.5% prior

- (EU) Euro Zone Jun CPI Estimate Y/Y: 2.4% v 2.4%e

- (GR) Greece Retail Sales Value Y/Y: -13.5% v -16.2%; Retail sale Volume Y/Y: -11.6% v -15.1% prior

- (GR) Greece May PPI Y/Y: 5.0% v 5.1% prior

Fixed Income:

- (IN) India sold total INR150B vs. INR150B indicated in 2017, 2022, 2030 and 2036 bonds

- (ZA) South Africa sold total ZAR800M in I/L 2025, 2033 and 2038 Bonds


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

***Notes/Observations***

- Euro surges on a handout and a promise; Merkel notes conditionality still remains

- ESM to be open for countries not in programs, and to "well-behaving" countries.

- Spanish and Italian yield plummet in session

- German Retail Sales disappoint


Equities

FTSE 100 +1.3% at 5564, DAX +2% at 6273, CAC-40 +2.4% at 3124, IBEX-35 +2.4% at 6882, FTSE MIB +2.6% at 13,735, SMI +0.80% at 6035, S&P 500 Futures +1.3% at 1339

- European equity indices opened the session sharply higher, led by more than 3% gains in the IBEX-35 and FTSE MIB, as EU President Van Rompuy said that the EU will eventually allow direct recapitalizations of banks. Additionally, he disclosed that ESM loans to Spanish banks would not have seniority and that countries not currently involved bailout programs (such as Italy and Spain) will gain the ability to access the EU's bailout funds. Van Rompuy said he wants these decisions to be ready by the July 9th Euro Group meeting. Following the news out of the summit, European banks are broadly higher, with the gains being led by Spanish, Italian and French Banks. As of the time of writing, European markets have pared gains, as Italian yields have moved off of the session lows, amid data which showed that banks in Italy continue to increase their exposures to sovereign debt (Italy Banks May net purchases of government debt: €12.3B v €6.6B m/m). Also Germany Finance Ministry affirmed that aid from the EFSF/ESM will always have certain conditions. In terms of upcoming event risks for today, Germany's parliament is due to vote on the ESM/Fiscal pact (voting in due to begin around 1500 GMT).
Also, today is the last day of the EU summit.

- UK Banks have underperformed their continental European peers, amid continued concerns about the ongoing probe related to Libor. Also, various UK banks announced a settlement agreement with the FSA related to allegations that they mis-sold certain types of interest rate hedging products. Following yesterday's sharp decline, shares of Barclay [BARC.UK] have moved between gains and losses on today's session. Education technology firm Promethean World [PRW.UK] has declined by over 40%, as the company announced a profit warning. In other UK movers, Berkeley Group [BKG.UK] has gained over 2.5% (issued FY11/12 results), Betfair [BET.UK] is higher by ~2% (reported FY11/12 results) and 3i Group [III.UK] is up by over 1.5% (announced cost cutting measures). In France, shares of Lafarge [LG.FR] have advanced by over 2%, as the company's reiterated its growth forecast for the cement market. Amid the broad gains being seen in banks, Credit Suisse is trading higher by ~3%, after disclosing that it expects to be profitable in Q2.

Speakers:

- German Chancellor Merkel commented that EU leaders reached an important decision at the EU Summit and agreed on precise conditions for EFSF/ESM bond purchases. Each ESM bank recapitalization plan would need unanimous approval. ECB would play a role in bank supervision.

- France Pres Hollande commented that the summit made progress on multiple fronts including bank recapitalization. Euro ministers enabled full use of crisis funds and the decisions help banks in Spain

- EU's Almunia commented that EU Summit agreement was a win for both Spain and Italy. ESM might be able to inject funds into banks by Jan 1, 2013 but countries that ask for help to reduce debt tensions must comply with EU recommendations

- Australia Treasurer Swan commented that they continue to watch EU policy measures. He believed that EU was taking steps in the right direction but by no means is the region's crisis was resolved

- Ireland Dep PM Gilmore commented that the Irish economy to recover faster after EU Leader Summit agreement and lowered the chanced that a second bailout would be needed. He reiterated view that the objective was to get back to market access for funding in 2013 and the Irish banks to be refinanced through ESM

- BOE released its Semi-annual Financial Stability Report which noted that the outlook for financial stability had deteriorated as a result of the EMU crisis. Uncertainty and tighter credit conditions have acted as a strong headwind to UK economic recovery and short-term risks remained elevated. UK banking sector exposure to most vulnerable EMU members was low and regared Greece, Ireland, Italy, Portugal and Spain as vulnerable. Direct impact of any potential Greek euro exit was manageable for UK banks. Banks free to use liquidity buffers in stressed times. Saw further tightening in credit supply if banks pass on entire rise in funding costs

- China Central Bank (PBoC) commented that GDP growth continued to be in targeted range with consumer inflation easing. It reiterated of growing uncertainty with the European crisis causing repeated shocks. The PBoC also reiterated it would maintain prudent monetary policy and its policy more targeted and flexible. To enhance two-way flexibility of exchange rate and to promote interest-rate liberalization

- India Govt Chief economic advisor Basu commented that India's economic growth to remain slow until Oct (first half of fiscal year) and have to live with high inflation for a while. He noted that inflation would likely move below 7.0% after Sept. Thus could not paint a rosy picture for India in the short-term

- India Central bank (RBI) Chakrabarty reiterated view that RBI would do its best to check INR currency volatility and saw no evidence of manipulation in Fx market

- Japan Foreign Ministry official confirmed that the accord with South Korean military intelligence postponed

- China National Development and Reform Commission's (NDRC) researcher commented that investment was central to supporting economic growth. He saw 2012 GDP growth at 8% with inflation at 3%. He stressed that there would be no repeat of 2008 stimulus campaign

Currencies:

- Risk was back on during the European session following Day one of the EU Leader Summit. The USD and JPY currencies were weaker against the European and commodity-related pairs.

- The Euro exhibited it biggest one day gain in eight months following the EU announcement of its roadmap towards further integration. The EUR/USD moved 200 pips off its Asian lows of 1.2433 to test 1.2627 ahead of the European session. The pair consolidated its gains throughout the European morning. The pause in the Euro rally attributed European's dealer view that the EU Summit results were basically a handout and a promise. German Chancellor Merkel reinforced that sentiment after she stated that each ESM bank recapitalization plan would face conditions and need unanimous approval

- Peripheral yield plummeted ahead of the European equity open while the core countries rose on the increase in risk appetite. The drop in peripheral yields attributed to EU Leader Summit plan that would allow ESM to be open for countries not in programs, and to "well-behaving" countries. Analysts noted that without formal lending program conditions were a win for both Italy and Spain at Germany's expense. The Spanish 10-year yield fell by 50bps at one point to test 6.35% before also consolidating while the 2-year slumped 100bps at one point. The US 10 Year moved below the 10 Year German yields for the first time since early Feb 2012

- CNY currency appreciates by 0.2% against USD during in June and this compared to the May decline of0.9%. The CNY ended the second quarter weaker against the greenback by 0.9% (record amount for the period)

Political/In the Papers:

- Early in the trading session the British Financial Services Authority (FSA) expected to announce that banks will be banned from selling interest rate swaps to small businesses as part of a settlement package. In the Telegraph report it was also noted that they may also have make large compensation payments to firms mis-sold complex derivatives.

Later the FSA agreed to settlement with four banks. Under the terms of the settlement, the banks agreed to provide "appropriate" redress, including partial or full refunds of the cost of the products, and stop marketing interest rate structured collars to retail customers.

- According to credit rating agency S&P, low interest rates and uncertain economic conditions are among the factors which could weigh on the ratings of insurance companies in France.


Looking Ahead

***All times listed for economic events are denominated in Eastern Standard Time (Add 4 hours for GMT equivalent)

- (DE) Germany Lower House planned vote on Fiscal Pact (expected late afternoon local time)

- (CO) Colombia Central Bank Interest Rate Decision: Expected to leave the Overnight Lending Rate unchanged at 5.25%

- (US) Jun NAPM-Milwaukee: 55.2e v 57.7 prior

- (RU) Russia Q1 Final Current Account: No est v $42.3B prelim

- 6:00 (PT) Portugal May Industrial Production M/M: No est v -6.5% prior; Y/Y: No est v 7.4% prior

- 6:00 (PT) Portugal May Retail Sales M/M: No est v -2.0% prior; Y/Y: No est v -9.0% prior

- 6:10 (UK) DMO to sell combined £3.5B in 1-month, 3-month and 6-month Bills

- 7:00 (US) Fed member Rosengren in Amsterdam

- 7:30 (IN) India Forex Reserves

- 8:00 (PL) Poland Jun NBP Inflation Expectations: No est v 4.3% prior

- 8:00 (PL) Poland Q1 Current Account: -€3.6B v -€5.0B prior

- 8:00 (ZA) South Africa May Budget Balance (ZAR): No est v -26.4B prior; Trade Balance (ZAR): No est v -9.9B prior

- 8:30 (US) Fed member Dudlry with fellow member McAndrews

- 8:30 (CL) Chile Central Bank Meeting Minutes

- 8:30 (CA) Canada Apr Gross Domestic Product M/M: 0.2%e v 0.1% prior; Y/Y: 1.8%e v 1.6% prior

- 8:30 (CA) Canada May Industrial Product Price M/M: 0.0%e v 0.0% prior; Raw Materials Price Index M/M: -2.0%e v -2.0% prior

- 8:30 (US) May Personal Income: 0.2%e v 0.2% prior; Personal Spending: 0.0%e v 0.3% prior

- 8:30 (US) May PCE Deflator M/M: -0.2%e v 0.0% prior; Y/Y: 1.5%e v 1.8% prior

- 8:30 (US) May PCE Core M/M: 0.2%e v 0.1% prior; Y/Y: 1.8%e v 1.9% prior

- 9:00 (CL) Chile May Manufacturing Index: No est v 2.6% prior

- 9:00 (CL) Chile May Unemployment Rate: No est v 6.5% prior

- 9:00 (CL) Chile May Total Copper Production: No est v 445.4K prior

- 9:00 (CL) Chile May Retail Sales Y/Y: No est v 7.1% prior

- 9:05 (US) Fed's Bullard Speaks on Economy in Arkansas

- 9:45 (US) Jun Chicago Purchasing Manager: 52.3e v 52.7 prior

- 9:55 (US) Jun Final University of Michigan Confidence: 74.1e v 74.1 prelim

- 11:00 (DE) German Chancellor Merkel on Parliamentary vote for ESM ratification

- 12:00 (FR) France President Hollande

- 12:00 (CO) Colombia May Urban Unemployment Rate: 11.0%e v 11.4% prior

- 15:30 (MX) Mexico May YTD Budget Balance: No est v -41.4B prior

Weekend data

Saturday

- 7:30 (IN) India Q1 Current Account Balance: no est v -$19.4B prior

- 21:00 (CN) China Jun Manufacturing PMI: No est v 50.4 prior

Speakers/Events:

Sat

- (MX) Mexico Presidential and Congressional Elections