A mid-morning soft patch on Friday (29 June) threatened to make it look just like all the other market reactions to previous EU policy initiatives: initial enthusiasm turning into disappointment once the details and conditionality became clear. However, with the ESM being ratified by both Germany’s Bundestag and Bundesrat, late Friday afternoon, and speculation growing that the ECB would re-start the SMP (Securities Market Programme), the markets continued to rally through to the market close.
Did the EU Summit justify such market reaction?
One of the biggest errors that European policy makers have made over the course of the crisis has been the insistence of seniority for official lending. The first weakening of this (with regard to the Spanish banking bailout) is therefore a sign that lessons are being learnt.
One big note of caution remains, the memorandum of understanding for the financial support for Spanish banking recapitalisation has not yet been published and it would be not completely surprising if there were some details, to protect northern eurozone taxpayers, which will disappoint. Talk about Merkel being outflanked is exaggerated, and progress on eurobonds is likely to remain slow.
As far as the ECB board meeting is concerned, a cut in the Refi rate to below 1% seems the most likely action to be taken, if any. Lowering of the deposit rate from 25 bps to zero (or even a negative level) would be a useful way of encouraging the banks sitting on liquidity to lend it into the real economy. Whether the ECB will go this far remains to be seen.
PMIs
China’s NBS PMI came in above market consensus at 50.2 (from 50.4 last time and 49.9 expected). The HSBC PMI for China also declined marginally, from 48.4 to 48.2. Sector break downs continue to show that small companies, particularly exporters, are being hurt. The export new orders index is at its lowest level since March 2009.
Seasonality in China’s PMI number makes the numbers hard to interpret, but certainly justify continued policy easing. South Korea’s PMI was also weak, falling to 49.4 from 51, although South Korean June export data surprised on the upside (+1.3% v 0.5% expected), presumably helped by the weak won. The German PMI bounced slightly to 45 versus expectation of remaining unchanged at 44.7. France’s softened to 45.2. Spain’s PMI fell further to 41.1 from 42 (consensus 41.2).
The absolute levels all suggest that greater policy accommodation in the eurozone is necessary.
