Europhoria fades a bit as a new week dawns

Last week’s EU summit did offer surprises – but also poses questions. We’re also back to the grind of a fresh batch of ugly manufacturing data around the world, reminding us of the weak global growth predicament.

EU summit bottom line: show me the money
The EU summit from last week did spark a tremendous short-covering rally in risk assets and the Euro, but while the German concessions at the summit were far more extensive than market observers were led to believe they would be, there are many pressing questions, the most prominent being that, while there has been tremendous expansion in the flexibility of the ESM, it is still not large enough (even if we assume it is fully ratified) to paper over the gaping holes in the EU’s collective bank and sovereign balance sheets. Besides, the ESM itself is funded by…you guessed it, EU sovereign debt! Yes, the EU can theoretically continue to extend and pretend for a good while to come, but this solution via the ESM is a flash in the pan unless we see even deeper cooperation from the EU politicians and more importantly, a commitment to allow the ECB to print endless piles of Euros to keep the system liquid. In other words – the jury is still out on Friday’s reaction to the summit news. So far today, the EURGBP has been the first move in unwinding the reaction late last week.

Also note the FTAlphaville coverage out today of a Reuters story that Finland and the Netherlands may be against using the ESM as agreed at the summit for directly purchasing sovereign debt. This issue must be watched carefully.

Chart: EURGBP
EURGBP has been the first chart to wipe away the reaction to the EU Summit news from late last week. Is it a leading indicator for other Euro crosses? Bonds are also very stable today, suggesting some reluctance to engage in an all out dip into the punch bowl on the EU news, given not only the risk that the EU crisis is far from solved, but also that weak global economic data remains a theme.

Global PMI day
China kicked off global manufacturing PMI day already this weekend with the official survey just eking out (of course!) an expansionary reading above 50, while the private-enterprise oriented HSBC survey suggests that the manufacturing sector remains in a slight contraction. The European surveys were very marginally better than expected on the margin, but still highly negative. It’s noteworthy that Switzerland’s survey ticked strongly higher and that Norway’s survey plunged in June. The US PMI is out shortly after I am posting this today – and it’s not likely to be a strong one either given the relatively weak batch of regional US manufacturing surveys this month.

A bit more on Aussie
Regarding my discussion of AUDUSD versus the fundamentals from this morning, it is worth noting the possibility that some of the Aussie resilience on “safe haven” flows may be coming from mainland China as stories abound of wealthier Chinese looking to exit China to park their wealth elsewhere now that the property bubble is unwinding. Look out for the RBA decision tonight for the next guidance on Aussie. The market is looking for about 88 bps of easing over the next 12 months, with the vast majority looking for the RBA to take a break at tonight’s meeting, though guidance will be crucial.

Looking ahead
It’s a busy first week of the month with all of the usual data and an ECB meeting on Thursday to boot, which could bring us the first ECB rate cut in a long time. Stay tuned.

Economic Data Highlights

• China Jun. Manufacturing PMI out at 50.2 vs. 29.9 expected and 50.4 in May
• Australia Jun AiG Performance of Manufacturing Index out at 47.2 vs. 42.4 in May
• Japan Q2 Tankan Large Manufacturers’ Survey out at -1 vs. -4 expected and -4 in Q1
• Japan Q2 Tankan Non-manufacturing Survey out at 8 vs. 7 expected and 5 in Q1
• China Jun. HSBC Manufacturing PMI out at 48.2 vs. 48.4 previously
• Sweden Jun. Swedbank PMI Survey out at 48.4 vs. 48.5 expected and 49.0 in May
• Norway Jun. PMI out at 46.3 vs. 54.6 expected and vs. 54.5 in May
• Switzerland May Retail Sales out at +6.2% YoY vs. +0.2% in Apr.
• Switzerland Jun. Manufacturing PMI out at 48.1 vs. 45.0 expected and vs. 45.4 in May
• Germany Jun. Manufacturing PMI out at 45.0 vs. 44.7 previous estimated and vs. 45.2 in May
• Euro Zone Jun. PMI Manufacturing out at 45.1 vs. 44.8 previously estimated and vs. 45.1 in May
• UK Jun. PMI Manufacturing out at 48.6 vs. 46.5 expected and 45.9 in May
• Euro Zone May Unemployment Rate out at 11.1% as expected and vs. 11.0% in Apr.
• Upcoming Economic Calendar Highlights (all times GMT)
• US Jun. ISM Manufacturing (1400)
• US May Construction Spending (1400)
• US Fed’s Williams to Speak (1715)
• China Non-manufacturing PMI (0100)
• Australia May Building Approvals (0130)
• Australia RBA Cash Target (0430)