Market wrap

Risk markets rallied sharply on Friday following a new pact announced at the EU summit. Markets were not expecting any significant progress but received three important initiatives were announced: the ESM bailout fund can support European banks directly (instead of via their governments), EFSF lending to Spanish banks won’t rank above investors (the EFSF merges into the ESM in July), and the ESM can intervene in government debt markets (restraining the rise in yields in Spain and Italy, in particular). A key element behind these initiatives was the softening of Germany’s earlier opposition, leading some to expect further progress towards communal European debt issuance. Outside Europe, China’s official manufacturing PMI beat estimates. European stocks closed 5% higher and the S&P500 closed up 2.5%. Commodities surged, the CRB index up 4.6%, oil +9.4%, copper +4.9%, and gold +2.9%. US 10yr treasury yields extended from 1.62% to 1.68% in London. Spain’s 10yr yield fell 61bp to 6.33%, Italy -38bp to 5.82%.

The US dollar index (DXY) fell 0.8% further during the London morning and then consolidated. EUR rose from 1.2560 to 1.2693, and consolidated in NY. It opened this morning at around 1.2670. USD/JPY rose from 79.40 to 80.00. AUD extended Friday’s domestic rally further from 1.0160 to 1.0259, and opened this morning at 1.0240. NZD similarly extended from 0.7950 to 0.8042, opening this morning at 0.8004. AUD/NZD rose with risk sentiment from 1.2740 to 1.2805.


Economic wrap

US core PCE deflator 0.1% in May, for the second month running, pulling the core annual pace down to 1.8% yr, after temporarily peaking at 2.0% yr in Mar. Meanwhile personal income growth remained sluggish at 0.2% and personal spending stalled in May after growing just 0.1% in March and April - the weakest three monthly growth pace since 2009.

US Chicago PMI little changed at 52.9 in June from 52.7 in May, the two weakest readings since the recessionary year of 2009. The Milwaukee PMI however roe from 57.7 to 60.2 in June. US Uni of Michigan consumer sentiment revised down from 74.1 to 73.2 in June, with both present and future components weaker. It was already the weakest reading for the year so far.

Canadian GDP growth accelerated to 0.3% in April, the fastest so far this year after stagnating monthly activity through Q1. Also industrial product prices were fl at for the second month running in May.

Euroland CPI steady at 2.4% yr in June flash estimate, holding at its lowest since early 2011. Meanwhile M3 money supply growth accelerated from 2.5% yr to 2.9% yr but private sector loan growth slowed to just –0.1% yr with loans falling every month since Feb, more evidence the economy is going backwards. German retail sales fell –0.3% in May and April’s gain was revised to a –0.2% fall but March was revised from a 1.6% to 2.2% gain. Weather may be a factor at play here.

BoE Governor King said the deteriorating outlook for financial stability is constraining the economy and delaying recovery and banks should build bigger capital cushions and have ready access to liquidity (launching the twice yearly financial stability report). “Uncertainty and tighter credit conditions have acted as strong headwinds to our recovery... [we] believe that there is a need for banks temporarily to raise their levels of capital in view of the exceptional threats they currently face.” Meanwhile UK GfK consumer confidence was unchanged at –29 in June.


Market outlook

AUD and NZD Outlooks: The EU summit outcomes caused sharp rallies in markets on Friday, swinging the near-term biases for the currencies from bearish to bullish. However, the potential for disappointment from the detail, execution and efficacy of the summit’s plans is significant, so we retain our bearish medium-term biases for now. The main event to watch today will be China’s manufacturing PMI (HSBC version). Australian data is minor (PMI, house prices, an inflation indicator, commodity basket price).

NZD/USD 1 day: Friday’s sharp rally changes the multi-day outlook to a bullish one. A small pullback to 0.7965 should be followed by a test of 0.8040.

NZD/USD 1 month: Below 0.7600.

NZ 2yr swap yield: Opening today unchanged at 2.74%

AUD/USD 1 day: Friday’s sharp rally changes the multi-day outlook to a bullish one. A small pullback to the 1.0250-1.0200 area should be followed by a push above 1.0260.

AUD/USD 1 month: Below 0.9800.