Daily Market Review 27 of June

The US stocks rose from their two-week low yesterday led by consumer, energy and financial shares and the S&P500 ended the day up 0.5% despite weak consumer confidence in the US. The bad news was tempered by another encouraging data point for the US housing market as the S&P/Case-Shiller price index showed that US home prices increased for the third month in a row. The positive sentiment in stock markets has carried into Asian trading. After two weakening days in a row in Europe, Wednesday trading is higher on sentiment in the day ahead of the June 28/29 EU summit. However, Germany’s Merkel remarks yesterday, completely against full shared liability; she said “over my dead body’, may signal not so strong progress in the summit.

Also yesterday, the eastern Mediterranean country of Cyprus edged out Italy and became the fifth member to formally ask for external funding from the EU to shore up its finances. The steps and the discussion regarding this request will be performed today.

The cost of Spanish government debt remained a negative focus across markets overnight with an auction of 3-month bills demanding a yield of 2.362 percent, a considerable difference to 0.846 percent last month. It’s evident Spain’s ability to raise cash in the traditional form is becoming unsustainable with the nation essentially being shut out of the debt markets. Although Spain has formerly sought financial assistance to recapitalize its stressed banking system, the risk of a sovereign bailout is growing, placing European leaders under further pressure to come up with a palatable blueprint at this week’s summit.

Today, Egan-Jones cut Germany’s sovereign rating from AA- to A+ and outlook still negative, citing the risk that the country will be left with significant uncollectable receivables due to its exposure to the euro-zone. This enouncement did do much to the markets but it did make us think that even Germany that is consider as a safe haven with a 10 year bond that are near 1.4% might not be immune to the Euro-Zone issues.

GOLD retreated $15 from an intra-day high of $1586 to open this morning at $1571 as investors' outlook for deflation persists. We have said last week that we expect gold to fall through the critical support zone of $1520-1530 in matter of weeks and we continue to support this view as rising Spanish and Italian debt yields keep casting a shadow on the physical economy and the virtual economy, causing more deflationary pressure. We will add to our short positions should gold fall through the previous low of $1557.

EUR/USD trading shouldn’t be that different from what happened yesterday. There will again be a lot of tactical comments and analysis in the run-up the summit. In markets, the key question is always what expectations are and what is discounted in the market. We have the impression that the market is more or less taking into account that this summit will not deliver many detailed measures to implement a broad-based sharing of debt liability at a European level. At best some kind of a roadmap will be set out.