Another Election, Another Tranche

<p>The lack of any unfavourable event from Greek elections detracts market’s attention from worrying about liquidity-solving measures by the central banks and returning to solvency […]</p>

The lack of any unfavourable event from Greek elections detracts market’s attention from worrying about liquidity-solving measures by the central banks and returning to solvency measures such as the receipt of Greece’s €1bn tranche from the IMF (withheld after May’s inconclusive elections), and; 2) Greece’s covering of its €3.9 bn interest payment to the ECB due in August.

There is chatter that any concessions the Troika was ready to grant Greece in the event of a Syriza majority may be channeled to the would-be New Democracy-led coalition. Such concessions may include further extension of loan maturities and containing interest rates but no delaying of fiscal targets.

Spain-German Spreads Shoot up 36 PTS
As Spain further awaits the formal disbursement of €100 bn in recapitalization, Spain 10-year yields hit a new Eurozone-era high of 7.28%. Nothing in Spain is being done to stop speculation of a full-fledged bailout to Madrid.

The latest run-up in Spanish yields drives up the spread over German 10-year yields to 5.79%. Spanish-German spreads have been above 5% for 16 days. It took 16 days of +5% Greek spread over German yields for Athens to obtain its first bailout; 24 days of 5% Irish spread over German yields for Dublin to get bailed out; and 34 days of +5% Portuguese spreads over Germany before Lisbon was saved.

We maintain our “risk-on” positioning into the end of the month, and consider the extension of the euro leg-up as a corrective bounce (seen capped at $1.30) to remain part of the 16-month decline in EUR/USD.


Friday’s release of the June Empire State Manufacturing survey fell to 2.3 from May’s 17.0, the lowest level since November 2011. The 14.8-decline was the biggest since June 2011, at the heart of the Italian-bank storm.

Remember earlier in the month we saw Chicago PMI hit its lowest level since October 2009 at 52.7, from April’s 56.2. We also saw the May Philadelphia Fed index on business outlook fell to -5.8 from April’s 8.5, its worst and first negative reading since September 2011. Its employment sub-index plummeted to -1.3 from 17.9, the worst reading since June 2010.

As both services and manufacturing ISM near the 50-level, the Fed will be forced to extend its asset purchases into the end of summer.

NOTE: When the manufacturing ISM fell below 50 in Dec 2007 (2 months after equities peaked out), services ISM did the same two months later.

The Fed’s inevitable signaling of further Operation Twist on Wednesday shall trigger a reflexive risk-on reaction, thereby supporting EUR/USD at $1.24, before retesting the $1.28 figure. This is likely to produce a 4-5 week consolidation in G-10 equity indices and risk currencies, especially as markets are increasingly detaching themselves from euro woes.

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