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Any Bounce in The Euro May be Short-Lived
Focus on any European debt-related headlines
Spanish government will make an emergency investment of 19 Billion Euro to recapitalize its troubled lender Bankia, Spain's fourth-largest bank. The bailout figure of 19 Billion Euro was larger than expectation of around 15 Billion Euro and is largest bank bailout in the nation’s history. The total amount of government infusion into Bankia will now be 23.5 Billion Euro and will give government 90% control over the bank's management.
The pressure on Spanish banks increased after Standard & Poor's Ratings Services on Friday cut the debt of several Spanish banks to junk status citing concerns about the soundness of the country's financial system and current risk in country’s banking sector. Also on Friday, S&P revised its economic risk score on Spain to 6 from 5 and also changed its assessment on Spain's economic imbalances to "very high risk" from "high risk" saying it believes Spain is entering a double-dip recession that will lead to a large increase in problematic assets.
Investors’ appetite for risk was boosted after separate opinion polls in Greece, published on Sunday, hints on growing support for the conservative New Democrats. The New Democracy party, which supports the negotiated bailout conditions with EU, was gaining modest lead over the radical leftist Syriza party, easing concerns that the country might exit the Euro-zone. With increasing support, New Democracy party should be in a position to form a coalition government and back conditions laid for 130 Billion Euro bailout package from EU and IMF. Investors now hope that Greece will continue with the Euro-zone. However, Euro-zone countries have already been asked to prepare a contingency plan for the possibility of an eventual Greece exit from the Euro-zone, which may pose contagion risk to the whole Euro-zone.
US Consumer Sentiment climbed to the highest level after 2007
According to report released on Friday, the final reading of the University of Michigan-Thomson Reuters consumer sentiment index climbed to 79.3 in the May 2012 survey, from 76.4 in April and 74.3 in last May’s survey. The May Expectations Index reached its highest level since July 2007. Economists had expected a final May reading of 77.7 - matching the preliminary estimate of 77.8.
A large batch of economic reports from the US on Thursday and Friday would provide a good look at the US economic condition that seems to be recovering.
BOE speculation
The data release last week showed UK GDP shrank more than initially estimated and retail sales also declined. According to the data released by the Office for National Statistics, GDP shrank 0.3% in the first quarter, more than the 0.2% drop estimated last month and Retail sales declined 2.3% from March. The minutes of the Bank of England’s meeting released on May 23 points that the Bank of England could resume stimulus if needed. This has raised speculations that the Central Bank will restart its program of asset purchases to spur economic growth.
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Source: Office for National Statistics, UK
China industrial profit falls in April
Official statistics released on Sunday from China by the National Bureau of Statistics said that the industrial profits of enterprises fell 2.2% in April from a year earlier, indicating that the economic slowdown has started weighing on some of the nation's biggest companies.
Investors moved slightly back into the euro as a lead in opinion polls for Greece's pro-bailout camps helped ease risk aversion and calm fears of Greek exit from the Euro-zone. Moreover, since the market is very, very short Euro, reactions to any positive news could be bigger than those to negative news.
However, uncertainty is unlikely to ease as Greece election are still some weeks away. The bounce in the Euro could be short-lived even if we get some good news from Greece as the bad news elsewhere is likely to dent investor sentiments.
Haresh Menghani
Market Analyst
Admiral Markets
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