Key news

  • US stocks closed higher – Asian markets are generally showing strong gains

  • Surprisingly strong Q1 Australian GDP report lifts AUD

  • Spain‟s budget minister takes headlines – speculation about precautionary credit lines

  • Seven German and three Austrian banks are downgraded by Moody‟s

  • Focus today is on the ECB – we expect a 25bp cut (only 11 out of 60 analysts surveyed by Bloomberg agree)


Markets Overnight

Risk assets rebounded yesterday on among other things a better-than-expected ISM non-manufacturing report – up marginally to 53.7. There is thus still high uncertainty about the near-term US economic outlook, as the ISM surveys generally point to stronger growth than indicated by last week‟s disappointing employment report. As investors struggle with what economic scenario to discount in the US and what risk scenario to discount for the eurozone, volatility is likely to remain high.

US stock markets closed with decent gains – the S&P500 index up 0.6% – and markets are generally showing strong performance in Asia this morning supported by a surprisingly strong Australian GDP report. The Australian economy expanded by 1.3% q/q in the first three months (consensus: 0.6). The result was a >1% spike in AUD/USD to above 0.9850. EUR/USD followed higher to trade back above 1.25.

This week‟s rebound in EUR/USD could suggest that consensus is not expecting an ECB cut later today, which is also the impression from analyst expectations. Our European economists, however, look for a 25bp cut today, see ECB preview: We expect ECB to cut in June.

Spain’s budget minister Cristóbal Montoro hit the news yesterday when he stated that Spain “does not have the door to the markets open” and on the subject of bank recapitalisation that “what we need is for the European institutions to get going and seek that bank recapitalization through those procedures that mean more Europe”. Apparently, Montoro was not speaking about aid to Spain, but the European process in general. However, recent comments by Montoro and prime minister Rajoy have been interpreted as a plea for „bank aid‟. Meanwhile, Die Welt reports that Spain may receive a precautionary credit line from the EFSF according to people familiar with current talks. Ten-year Spanish government bonds tightened 10bp yesterday.