Eurozone issues resurfaced after a multi-week hiatus. A Bloomberg report on a EUR 12bn funding gap in Spain to cover regional governments may have sparked the 28bp selloff in Spanish 10yr government bonds which reached 7.28% - matching the decade high set on 18 June. Spain’s stockmarket fell 5.8%. Some regions have declared funding difficulties, Valencia requesting a EUR 2bn bailout and Catalonia considering one according to El Pais. Contributing to the mood, minor rating agency Egan Jones cut Spain’s sovereign rating from CCC+ to CC+, and the ECB declared Greek debt as ineligible for collateral in it operations. The S&P500 closed down 1.0%, while commodities were moderately lower (CRB index -0.1%, oil -0.9%, copper -2.4%, although foods continue to rally). US 10yr treasury yields fell from 1.50% to 1.45% - just above the 1.44% record low.
The US dollar index (DXY) rose by around 0.8% on the risk averse mood. EUR fell from 1.2280 to 1.2144 – a two year low - by the NY open and drifted sideways until the close. USD/JPY ground slightly lower from 78.60 to 78.45. AUD fell from 1.0425 to 1.0363 before partly recovering during the NY afternoon to close at 1.0378. It opened this morning at 1.0360. NZD similarly fell from 0.8055 to 0.7980, and opened this morning at 0.7990. AUD/NZD rose from 1.2965 to 1.2995 where it met strong resistance.
No US data.
Canadian CPI accelerates to 1.5% yr in June from 1.2% in May, and the BoC core rate rises 0.2 ppts to the 2.0% target. Some energy prices, especially natural gas and gasoline, were constraining factors, while electricity and auto prices picked up.
German producer prices decelerate to 1.6% yr in June, their lowest since mid 2010 and the pace they were running in nearly 2009 when the global economy was slumping.
UK budget deficit was £14.4bn in June up from £13.9bn a year earlier. This was wider than expected and increases the prospect that the full year deficit target of £120bn will be exceeded.
Spanish 10 yr bond yields hit 7.2%, equities down 5%. This followed confirmation by the Eurogroup finance ministers: Spain will receive up to €100bn to recapitalise the banks, with the EFSF setting aside €30bn initially and the final amount being determined once the audit of the banks is completed, probably in September. When up and running, the ESM will provide the balance of the funds. The loans, of up to 15yrs tenure, will be made to the FROB which is an agent of the Spanish govt, which will retain the full liability for the assistance. One takeaway from this is that we can disregard what EU leaders claim to have agreed at their next summit; to find out what the truth is, just look at Ms Merkel’s face. Meanwhile, Spain has found €15bn to bailout regional administrations like Catalonia and Valencia that have lost access to markets but claims it won’t impact published debt raising plans. Investors don’t like it; they are losing faith in Spain’s ability to finance herself and can no longer trust what the political leaders across Europe say.
AUD and NZD Outlook: It’s possible last week’s mini-rallies have ended so a cautious stance is warranted today. Domestically we have Australian PPI inflation, Westpac’s economists forecasting above consensus.
NZD/USD 1 day: 0.7980 needs to hold for a push towards 0.8055.
NZD/USD 1 month: 0.7900.
NZ 2yr swap yield 1 day: Opening today 4bp lower at\ 2.60%.
NZ 2yr swap yield 1 month: We expect the 25bp decline in yield since 4 July to continue towards 2.35%, driven mainly by Eurozone disappointments.
AUD/USD 1 day: If 1.0325 holds, AUD can continue its push towards 1.0445.
AUD/USD 1 month: 1.0150.