EU Summit: Bono's back from the edge...

...but i still havent found what im looking for!

Achtung Baby!

On its initial inspection of the EU summit statement the markets were sceptical. Sceptical of the fact that there was plenty of encouraging and rallying verbiage but little quantifiable or quantitative content. But in comparison to the previous Summits (of which I believe there have now been 20-ish), all of which have been billed as the forum for the solution of the eurozone debt woes, it was a comparative success.

“You gave it all but I want more”

In essence the proposals, which still have to be formally agreed (along with the imposition of conditions that are likely to be stricter than the periphery may wish) and ratified by national lawmakers, if not populations, were as follows:

• EU are to give up ESM seniority (while there is some doubt if this is specific to the direct recapitalisation of the Spanish Banking sector via the bailout mechanism (EFSF / ESM) or valid for all EFSF / ESM bond purchases for programme and non programme countries)
• EU agree the establishment of a Eurozone supervisory body for banks, and
• EU accept tapping of the bailout funds without austerity “if countries respect debt rules”, which enables a ‘growth pact' of 1% GDP or EUR 120B

Ultimately what we got was a step closer to a banking union, a more flexible EFSF/ESM and perhaps most significant for the short term trading dynamic, Spain gained concessions that gave a boost to its Bonds (or Bono’s), which rallied sharply on Friday, taking their yields back away from the psychologically dangerous 7% level.

Stuck in a moment you can’t get out of?

The key point, however, is that there is no new money (above the already agreed EFSF and ESM) for the banking recap and peripheral bond purchases unless the ESM is allowed to repo its bond holdings with the ECB to allow for leverage, which would require a banking licence, itself requiring treaty change (and perhaps a German referendum).  In addition, the seniority of ESM in its bond buying has not been removed, hence any significant purchases from the bailout mechanism will likely see a return to a self fulfilling sell off in Spanish debt.

“See China right in front of you”

Global slowdown and implications from crisis on global growth trajectory remain. Stronger than expected data from China and Japan overnight have supported sentiment as we enter a significant week for policy and data and the start of H2 2012.

On the data front, the PMI activity data will be a focal point and today is the turn of the manufacturing sector (after seeing the China data confound expectations of a move into contraction) with the US and UK releases. The equivalent data from the eurozone is also released but there will likely be little variation from the disappointing flash estimates already priced into the market.

Running to stand still?

In addition to the global economic data, which likely reaches a pinnacle on Friday with the US employment report, this week will also be a very important week for monetary policy action. Expectations are almost in consensus for GBP50-75B increase to the MPC’s Asset Purchase Facility (APF) or QE, where I feel the ‘fact’ is likely to prove supportive for GBP after the ‘rumour’ has seen some recent underperformance. In the eurozone it is also the consensus view that Draghi sanctions a 25bp cut in the base rate to 0.75%, in addition to perhaps some further ‘contingent’ non-standard measures.

For the day I suspect the market will continue to trade in a slightly nervous fashion as the events of last week are digested. The outcome of the EU summit was undeniably a positive, particularly in comparison to previous summits, but as the dust settles the markets will have to decide whether the announced measures are enough. Sadly, in my opinion, they are not.