After markets were disappointed with Merkel and Sarkozy following their latest press conference - in which they both rejected the idea of eurobonds and expanding the ESFS - Merkel has doubled down on the no eurobonds message.

width=300From Marketwatch: German Chancellor Angela Merkel on Sunday ruled out euro-zone bonds as a solution to the region's ongoing debt crisis, telling Germany's ZDF television that politicians can and won't simply run after the markets. Investors have increasingly clamored for joint issuance of euro-zone bonds as a solution to the euro-zone debt problems. Merkel said the implementation of euro bonds would require changes to the European Union treaty and other legal hurdles. Merkel said it was important for each country to take steps to reduce debt.

From Bloomberg: Joint euro bonds would require European Union treaty changes that would take years and might run afoul of Germany's constitution, Merkel said. While common borrowing might arrive at some point in the distant future, bringing in euro bonds at this time would further undermine economic stability and so they are not the answer right now.

At this time - we're in a dramatic crisis - euro bonds are precisely the wrong answer, Merkel said in an interview with ZDF television in Berlin yesterday. They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.

The news did not dent the EUR however, as the EUR/USD rallied in the European session, along with S&P500 futures, and commodity currencies like the AUD and CAD. Stocks in Europe were higher, with the FTSE100 up 1.97%, the CAC 40 up 1.75%, and Germany's DAX up 0.74% as of 7:30AM ET.

From Bloomberg: European stocks rebounded from a two-year low amid speculation the Federal Reserve may this week signal additional measures to stimulate the economy. U.S. index futures rose while Asian shares fell.

Gains in European shares were limited as German Chancellor Angela Merkel resisted calls for common euro-area borrowing amid mounting concern the economic recovery is at risk. Speaking in an interview with ZDF television from the chancellery in Berlin yesterday, she said bringing in euro bonds at this time would further undermine economic stability.

From Reuters: Stock index futures pointed to a slightly higher open on Wall Street on Monday, with futures for the S&P 500 up 0.61 percent, Dow Jones futures up 0.55 percent and Nasdaq 100 futures up 0.73 percent at 3:44 a.m. EDT. European shares gained ground in early trade on Monday, with defensive sectors such as pharma, telecom and utilities leading the tentative rally following last week's sharp losses.

The gains in equities were led by increased speculation that Federal Reserve Chairman Bernanke will unveil a new round of quantitative easing in his Friday Jackson Hole Speech. That put pressure on the USD.

width=384From Meanwhile, the dollar came under pressure as speculation grew that Ben Bernanke, Fed chairman, would use a speech in Jackson Hole, Wyoming, on Friday to announce a third round of quantitative easing, QE3, in an attempt to stop the US economy from falling back into recession. QE3 would probably lead to further dismay among foreign investors and selling of the dollar, said Todd Elmer at Citigroup.

From Bloomberg: Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke to signal as soon as this week that the central bank will begin a third round of asset purchases to boost the economy, a scenario the world's biggest bond dealers said is unlikely.

Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2 percent.

Meanwhile, we have more jawboning from the Bank of Japan about intervention, which makes some foray into the currency markets more likely this week, especially if the Yen breaches record highs against the USD this week.

From Retuers: Japan will take decisive action against any speculative moves in the currency market, Finance Minister Yoshihiko Noda said, signaling Tokyo's readiness to intervene to stem further yen rises after its spike to a record high last week.

Noda said he saw recent yen rises as even more one-sided than before and that Tokyo would exchange information closely with other countries regarding currencies, suggesting it would stay in frequent contact with its Group of Seven partners.

We will watch markets even more closely than before to see whether there is any speculative activity. We won't rule out any measures and will take decisive action when necessary, Noda told reporters on Monday.

Noda, Prime Minister Naoto Kan and top government spokesman Yukio Edano all repeated the phrase throughout the day, a sign that it has become the new line Tokyo would use to warn markets that intervention is an imminent possibility.

And one of the biggest developments this weekend and overnight, we saw the celebrations of Libyans as rebels moved into Tripoli, and the Qaddaffi regime melted away. The victory for the rebels may just mean that the 7-month old conflict in Libya may be on the verge of ending, which in the financial markets means that the oil production that had been lost over the last 7 months may start to come back online.

width=540From Bloomberg: The European benchmark contract tumbled more than 3 percent amid speculation Qaddafi's regime is crumbling, while New York crude erased declines. Libya's output dropped to 100,000 barrels a day last month, a Bloomberg News survey showed. That's less than 10 percent of the 1.6 million barrels the nation pumped before the uprising started in February.

Oil prices have already eased the last 4 weeks amid traders and investors pricing in weaker global growth - led by fear of a double dip in the US and an escalating sovereign debt crisis. This news can knock back the risk premium we have seen in Brent oil over the past half a year.

Brent, more sensitive to global supply disruptions than WTI because it's a benchmark for half of the world's oil, advanced 19 percent in the first half of 2011 as an armed rebellion against Qaddafi disrupted the country's supplies and prompted Saudi Arabia to push for increased output from the Organization of Petroleum Exporting Countries. Libyan rebels said they captured two of Qaddafi's sons as they pushed into Tripoli yesterday.

Nick Nasad
Chief Market Analyst