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The main events that have impacted the markets so far today include: 1, the formal announcement of Spain's bailout, 2, the downgrade of Cyprus to junk status with a negative outlook by Fitch rating agency and 3, news from the EU that the Troika is delayed in Athens but it will still release the EU 1bn payment of funds to Greece in the coming days.
Spain's bailout - where are the details???
The Spanish bailout has done nothing to help Spain's bond market, yields on 10-year government bonds are up by 20 basis points this morning, above 6.5%.This may be below the 7% line in the sand, but it is still too close for comfort. So what will it take for Spanish bond yields to fall to a more sustainable rate? Firstly, we need to know how much cash Spain has asked for (we still haven't had the exact sum confirmed) also we don't know where the money will come from. Will it be a loan to the Spanish government which is then distributed through Spain's banking authority or will it come direct from the ESM/ EFSF bailout funds? This is a crucial differentiation as one makes Spain's government debt burden larger (if the loan is routed through the Spanish banking authority), and thus the country less credit worthy.
Europe not the only source of concern
Not only is the market concerned about Spain but there are also issues in the Middle East to contend with. Tensions between Syria and Turkey and also the new government in Egypt could weigh on market sentiment as the markets and analysts digest both bits of news and weigh up what they mean for the region, the west and the global economy in general.
However, it's the EU summit that is dominating things this week. The summit on 28/29th June is expected to deliver something - either a big bazooka or lay the foundations for the United States of Europe. But is there the will or the way to deliver these things? We shall have to see. We are releasing a Special Report EU summit Preview later this week with more detail, so watch out for it.
Data has been fairly thin on the ground today, which means that markets are sensitive to headline risk. We wouldn't be surprised to see a bearish bias in risk assets as we lead up to this Summit, especially as it has been couched as the only way to save the Eurozone...
Hence we are in mild risk-off territory today. Germany held a debt auction earlier and managed to sell 12-month bills for a teeny 0.019% yield. This is bad news for risky assets, as yields this low suggest the market is pricing in the risks of a recession. At the other end of the bond spectrum, when Spanish bond yields move higher this tends to weigh heavily on the euro and stocks. European indices are lower today and EURUSD is back below 1.25. So far 1.2470 is holding as fairly good support. Our range is still 1.2450 - 1.2750 as we lead up to the summit, but a breach of 1.2450 opens the way to the 1.2350 lows from earlier this month. Unlike at other summits when the markets have bought the rumour and sold the fact, we seem to be selling the rumour this week. There is little faith that Europe can deliver the goods this time when it needs to most thus we could see EURUSD sell off into the meeting, only to rally on any good news or concrete action from the summit.
I'm watching stocks in the US closely as we start the week. Oil has tumbled sharply, Brent is hovering around $90 per barrel, Treasury yields are in risk aversion territory and stocks in the US look too resilient. The SPX could this be due a bit of a reversal. After failing to get above 1,360 - the 100-day sma, it is now at risk from a move back towards 1,300 (1,295 is the 200-day sma and a major support zone). If the EU summit disappoints, this may be enough to push the SPX below 1,300 and in that scenario we could envision risk assets going into free-fall. If the EU Summit does just about enough to keep the currency bloc together then we could see a meander lower in risk assets in the third quarter, which is our base-case scenario at this stage.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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