Week Ahead

The stress tests have been released and though the market ‘fretted’ that up to 20 firms, including some big fish, would fail, in fact the European Banking Authority said that only 8 firms failed, and most were small. The largest – ATE Bank – was said to need €713m, but €1.3bn was already earmarked for ATE by the IMF/EU. Of the failures, 5 were Spanish, 2 were Greek and 1 was Austrian. Late in the session, EU President Van Romuy called a heads of state meeting for July 21st regarding the “financial stability of the Eurozone as a whole and the future financing of the Greek programme.” The adage is that EU leaders have been responding to crises seemingly unable or unwilling to get in front and control the situation. In the US, the political chattering class, or at least some prominent elements, seem to court crisis regarding the debt limit/deficit cut debate. Overall, markets were mixed on Friday, down in Europe, with very small gains in the US. In FX, range were very tight apart from CAD (+0.6%) and AUD (-0.8%). AUD/CAD is below 1.02 and testing support.

USD: With the Sword of Damocles dangling above the US credit rating (Sword of Moody’s?) there is no firm debt deal yet, though President Obama did request plans that could be the framework for a deal in the next 24-to-36 hours. This suggests some notable focus on these issues early next week, when time will be running out to get a deal that can pass through Congress. The DXY index was in small negative territory and US data did little to help. CPI was mixed, headline a shade below expectations, core a touch above. The July Empire MFG survey was disappointing (-3.76, cons: 5.0), as was June IP (0.2%, cons: 0.3%), and the Michigan sentiment survey was just bad (63.8, cons: 72.2 from prior 17.5). Most of the deterioration in Michigan was in the expectations category. So, not only are things not as cheery now, but optimism about the future has declined sharply.

EUR: While the stress tests might have been relatively “good news”, an enthusiastic response by EUR was curtailed by a sharp deterioration in EU periphery spreads. Greek 2-year spreads with bunds jumped over 3000 bps, Portugal’s hit 1800, Italy touched 300. Moves in 5- and 10-year spreads weren’t as worrisome, but were far from calming. Not surprisingly, EUR was largely locked in place just above $1.41.

NZD: Though arrears of CAD, NZD was a sparkler on Friday too. AUD/NZD crashed through support at 1.28 and is now sitting below 1.26, taking out support at 1.2642. It looks like 1.25 is in train, as trend line support back to October 2008, has been broken. Q1 CPI is due.