Markets overnight

  • It has been a calm weekend with a light newsflow. In the US, the political debate is intensifying ahead of the autumn election. Obama has announced that he seeks to extend the Bush-era tax cuts but only for those families with an adjusted gross income of less than USD250,000 and military families.

  • Merkel said on Sunday that the question on liability for future bank bailouts remain undecided. She said that “According to the rules, the Spanish government is naturally liable for the Spanish program”. The confusion on this issue remains intact.

  • At last week’s Eurogroup meeting ECB’s Draghi pushed for senior bond holders to take part of the losses in the most severely damaged Spanish banks. This is a turnaround for ECB and a contrast to the Irish case from 2010. The finance ministers rejected the idea as they feared financial markets would react badly.

  • EBA chairman Andre Enria said the temporary capital requirement of 9% of RWA could become permanent “We don’t want the capital to be released. We want the banks maintaining this capital level and gradually moving to the Basel III full implementation. We will be asking the banks to develop capital plans to get there”.

  • The Spanish banking sector is increasingly relying on ECB funding. Data released on Friday by Bank of the Spain showed that the country’s banks borrowed EUR365bn from ECB in June – the borrowing has doubled since the beginning of the year. The lending to Spanish banks accounts for 30% of all ECB’s lending, and is clear evidence of increased fragmentation of the banking sector within the EMU.

  • Risk appetite improved on Friday and the positive sentiment carried over to US equities. The S&P500 ended the trade up by 1.6% supported by a earnings report from J.P. Morgan that exceeded expectations. In Asia, stock indices are trading in positive territory this morning. Hang Seng is up 0.2% (Japan is closed today). Also US bond yields increased slightly from the very low levels with 10-year treasury yields ending at 1.49% on Friday. In FX markets, the EUR/USD is trading sideways around 1.225 – close to a two-year low. Brent oil remains in triple-digit territory after the US announced additional sanctions against Iran last week.

  • Focus today will be on US retail sales and empire manufacturing PMI. We expect another weak reading with retail sales dropping 0.2% m/m despite a decent increase in both autos and building materials. Excluding these components we expect a drop of 0.4% m/m. This will be the third month in a row with decreasing retail sales, and an indication that the uncertainty regarding the fiscal outlook and the European crisis is weighing down on consumption. The empire manufacturing PMI will be watched closely in the market as we await Bernanke’s semi-annual monetary policy report to the Senate tomorrow. The weakness in job growth will keep the Fed alert and we still see a good chance of additional easing. For an update on US growth outlook see Research US: Revising down US growth. The earnings season continues with Citigroup reporting today.


Scandi Daily

  • No major Scandi events scheduled for today but watch out for data on the trade balance in Norway and Danish wholesale prices.