Market expected to open today-
USDINR- Down
EURINR- Down
GBPINR- Down
JPYINR- flat or UP
Risk markets fell on negative European news.German Chancellor Merkel voiced opposition to debt sharing unless accompanied by fiscal oversight, dampening expectations of any pan-European blueprint from this Friday’s European leaders’ summit. Cyprus confirmed it will seek a a bailout from the EU, Greece’s finance minister resigned due to stress, and Moody’s is reportedly downgrading Spanish banks today by up to 4 notches. European stocks closed down 2.6% and the S&P500 is currently down 1.8%. Commodities were mixed, the CRB index up 1.1%, oil -0.8%, and copper +0.7%. US 10yr treasury yields fell from 1.66% to 1.60%, benefitting from the risk aversion. Eurozone peripheral bonds were weaker, Spanish 10yr yields up 26bp, Portugal +19bp and Italy +21bp.
The US dollar index (DXY) is slightly firmer. EUR fell from 1.2530 to 1.2471, currently at 1.2500. USD/JPY extended an Asian session decline from 80.60 to 79.44. AUD fell from 1.0040 to 0.9969 but recovered to 1.0003 in NY as equities stabilised. NZD similarly fell from 0.7886 to 0.7844, recovering to 0.7874. AUD/NZD extended its decline since mid-May to 1.2690.
Economic wrap
US new home sales rose 7.6% in May. April’s 3.3% sales recovery from the 7% March fall was revised away to a further fall so the rise in sales in May only reverses the losses in March-April. It seems that mild weather boosted the figures early this year, at the expense of March-April, and in May sales are normalising. The annualised sales pace in May was 369k little changed from 366k in Feb, but the highest since the tax credit for home buyers was withdrawn in Q2 2010. Recall that the peak sales pace in 2005 was 1389k so the industry is barely a quarter of what it was 7 years ago, three years into the economic recovery.
US Dallas Fed factory survey recovered from sub zero readings in April-May to 5.8 in June (up 10.9 pts from May), still weaker than any month in Q1 which averaged 14.6, compared to –0.9 in Q2. Meanwhile the Chicago Fed national activity index which is not surveyed directly but compiled from other data (about 80 diff erent series) fell from 0.08 to –0.45 in May, its second weakest reading (after March this year) since April last year, further confirmation of the much softer tone of US economic data of late.
Merkel makes markets meltdown. Speaking at a conference, the German chancellor said that at the EU leaders’ summit later this week she would seek to oppose discussion of joint liability (euro bonds, fiscal transfers, etc) preferring to focus on “improved oversight and structural measures”. Markets collapsed on concern this 19th summit on the sovereign debt crisis would achieve little apart from more debate.
EU Summit Fears Mounting, EUR/USD Down
U.S. Dollar Trading (USD) with the EU Summit starting on Thursday the market is starting to price in a failure of EU officials to make progress with German Chancellor Merkal once again stating she is against the idea of Eurobonds. Such Joint liability she believes will not address the main cause of the crisis which is fiscal discipline and structural reforms. Global stock markets are under pressure as the uncertainty grows and risk assets/currencies are being sold aggressively. Looking ahead, April Case Shiller House Prices forecast at -2.5% vs. -2.6% previously.
The Euro (EUR) the EUR/USD grinded lower with after opening at 1.2550 to break below 1.2500 and find support at 1.2480. The EUR/JPY was a constant source of selling pressure falling from Y101 to below Y100 as the Safe haven roared back into favor. EUR/JPY eventually found support at Y99.2 and is retracing in Asian trade Tuesday so far but with the EU summit looming more selling on rallies is expected. The Sterling (GBP) the GBP/USD was more stable than most majors with a tight 50 pip range 1.5540-90 containing Monday’s price action. The EUR/GBP once again was on the downside grinding towards the 0.8000 level and helping to support the major from larger losses. Looking ahead, July German Consumer sentiment forecast at 5.6 vs. 5.7. Also ahead, UK May Public sector net borrowing forecast at 14.25bn vs. -18.81bn previously.
The Japanese Yen (JPY) the USD/JPY was a big mover on the day falling from above Y80 to below Y79.50 as sentiment changed dramatically on Monday from last week. There are concerns that the EU summit will fail and that Japan itself will be having political risks with a major tax bill to be voted on this week. The rejection of the Y80 level is very concerning for the bulls and the price action this week will be watch closely by medium term traders. Australian Dollar (AUD) the large falls in Global stock markets on Monday weighed on the AUD/USD which is a traditional risk currency. The key 1.0000 level was broken in US trade and support was found at 0.9970. The outlook is mixed with the recent rally now under threat and whether we close under 1.0000 is key for this week’s trade. Looking ahead, no major economic data releases.
Oil & Gold (XAU) Gold reversed higher overnight bucking the strong USD as the Eurozone debt crisis once again festered and investors flooded into the safe haven and alternative investment in the precious metal. OIL/USD fell from $80 to $78 before recovering to $79 as the rollercoaster to the downside continued. Falling global demand outlooks have been the main catalyst for the recent drop.
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