Market votes no confidence after EURUSD squeeze

The week saw Euro shorts squeezed a bit, but the Spanish bond market today shows that the market still lacks confidence in the EU’s approach to the rolling crisis.

Risk appetite and Spanish bonds opened the day on a strong note for obvious reasons on the weekend bailout news, but by this writing Spain’s bonds crumbled significantly again, with yields trading at the highs of the day and 27 bps abov Friday’s close for the 2-year (at 4.56%) and 21 bps higher for the 10-year (at 6.43%).

This is hardly an expression of confidence that the EU’s approach is working here(touted by Finland’s Katainen as the first time that the EU is thinking “ahead of the curve”).There were also a stream of statements swirling around that show there is not even agreement on where the funds for the bailout are to come from. Recall that the EFSF is merely a series of promises, and a good portion of those promises are from Spain itself, the very country that is asking for help. The ESM is the longer term rescue fund that is officially meant to have funds “at the ready” – or fully funded – but it was not scheduled for full implementation until next month. Basically, the trail leads back to Spain, which is on the hook for this new debt as well – it looks like this solution leans more on the “pretend” side of extend-and-pretend… and by loading the bailout to Spain’s already impossible fiscal picture, it’s understandable that Spain’s yields spike again today.

Oh – and then there is the question of this weekend’s Greek vote, a possible second bailout needed for Portugal and now Italy may soon be the next in line. The on-going uncertainty saw EURUSD back within arm’s reach of 1.2500 today after it tried above the pivotal 1.2620 level in Asian hours. EURGBP and EURJPY charts both posted bearish candlestick reversals today, suggesting that the Euro remains on the defensive.

Chart: EURGBP
EURGBP rallied through local resistance and to its highest level in a few weeks, but the powerful reversal off of gap highs today was echoed elsewhere and suggests the near term side of least resistance is back to the downside now.

Looking ahead
The recent rally in risk assets, as far as I can tell, was built on the anticipation of the Spanish bailout and on anticipation that the Fed money-printing cavalry will soon arrive on the scene. Bernanke’s appearance last week didn’t do much to underline the latter as I have discussed, and the market is quickly expressing doubt on the former, which could see risk appetite back on the barbeque sooner rather than later. Certainly if we have a look at the bond market today, we have seen an epic reversal from the sharply sell-off that fully closed the gap from Friday’s close.

The rest of the week is fairly light on the economic data front, but fairly heavy on the central bank meeting front. We’ve got US Retail Sales on Wednesday as the biggest data highlight of the week. As for central banks, the RBNZ is out on Thursday, as is the Swiss National Bank. On the SNB, please have a look at the rising risks that SNB will be forced to abandon the EURCHF peg from our Chief Economist Steen Jakobsen. The Bank of Japan is up on Friday.

Stay careful out there, as always.

Economic Data Highlights

• Japan May Consumer Confidence out at 40.7 vs. 39.8 expected and 40.0 in Apr.
• Japan May Machine Tool Orders fell -2.9% YoY vs. +0.4% in Apr.
• Norway May CPI out at 0.0% MoM and +0.5% YoY as expected and vs. +0.3% YoY in Apr.
• Norway May Underlying CPI out at +0.4% MoM and +1.4% YoY vs. +0.1%/+1.1% expected, respectively and vs. +0.7% YoY in Apr.

Upcoming Economic Calendar Highlights (all times GMT)

• UK BoE’s Posen to Speak (1415)
• Us Fed’s Lockhart to Speak (1600)
• US Fed’s Williams to Speak (1600)
• New Zealand May REINZ Housing Price Index (2200)
• New Zealand May Credit Card Spending (2245)
• UK May RICS House Price Balance (2301)
• Japan May Domestic CGPI (2350)
• New Zealand May QV House Prices (0000)
• US Fed’s Evans to Speak on Economy (0015)
• Australia May NAB Business Conditions/Confidence (0130)