European stock indices have given back their earlier gains this morning and EUR/USD is also trading well below its intraday highs. Risk has managed a reasonable recovery in recent sessions but the recovery has not been seen in all indicators of risk and this casts doubts on the sustainability of the rally. Most obviously Libor remains at elevated levels as are the costs of insuring against bank debt.

The publication of banks stress tests in Europe may help bring to end broadbased suspicions between banks. Although transparency is good for overall long term health for the market, it seems unlikely that all banks will be given a clean bill of health which will test investor's resolve in helping in the provision of fresh capital. At the very least this could increase market volatility through the summer months, though risk aversion could be given a fresh boost if negative surprises are greater than feared. The EUR is not yet out of woods.

Better than expected UK public sector borrowing data provided an interesting read this morning ahead of the June 22 emergency budget. The May borrowing requirement came to GBP 16 bln compared with a median expectation of GBP 18 bln. Encouraging news within this data is the GBP 6.1 bln pick-up in tax receipts in the first 2 mths of the fiscal year. Although this has been almost entirely offset by the GBP 5.7 bln increase in expenditure, the figure nevertheless hints that upward trend in the borrowing requirement has been levelling off.

This may mean that the axe to public spending could fall a little less heavily than feared going forward. Sterling benefitted on the data release but has been unable to hold these gains. EUR/GBP ran into solid support above the 0.8325 and is holding little changed from last night's close. Cable has given up its earlier gains, trading largely in tune with EUR/USD and currently holding just above the USD1.4815 technical support.

EUR/CHF has continued to probe the downside this morning. The recent improvement in Swiss economic data and admission by the SNB yesterday that deflationary risks have all but disappeared suggest that any further intervention by the SNB will be aimed at limiting rather than reversing the move. This suggests there may be further room yet in the EUR/CHF downtrend.

The AUD and the CAD have both traded in a choppy fashion in Europe suggesting uncertainty about the direction of risk. Oil is softer this morning, also hinting that the market may be reluctant to extend risky position ahead of the weekend.

There is no US data this afternoon, Canadian leading indicators are due.

Jane Foley

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