European markets will be fixated on the aftermath of the EU Summit and how it plays out in key central bank decisions. The ECB is expected to cut by 25-50bps on Thursday, and the BoE is expected to increase the scale of its asset purchase program by £50B to £375B. Neither are shoe-ins, and are at least partly contingent upon the Summit’s sustained market influences. Sweden’s Riksbank is expected to keep pausing at 1.5%. At issue is how to play the in-between prospects of loose objectives surrounding long-run structural reforms alongside the material steps that have already been announced. These include dropping senior subordination; direct recapitalization of banks by the EFSF after a single supervisor has been established, and the use of tools to intervene in primary and secondary markets which itself is anything but new.
Global markets surged on Friday on the news of the “grand short term” plan to go into effect on July 9th.
With little to no expectations of the EU Summit, markets were surprised.
The details released are:
1. A proposal for a single bank supervisor (including the ECB).
2. Once a single bank supervisor is established, the ESM could have the Possibility to recapitalize banks directly.
3. Similar cases to Ireland will be treated equally.
4. The EFSF will be used until the ESM becomes available.
5. EFSF loans will be then transferred to the ESM without any seniority (the ESM as currently structured has seniority).
6. Strong commitment to do what is necessary.
7. The above to be implemented by July 9, 2012.
* There was also a reiteration of the €130bn growth pact that the gang of 4 had agreed to last Friday
EURUSD (1.2660) surged over 2 cents on the news from the EU Summit and the Dollar Index declined to below 82.00 and the euro continued to climb throughout the day as investors sought more risk the USD weakened.
GBPUSD (1.5700) Sterling was able to gain momentum on the weakness of the US, as global markets hailed results from the EU Summit. As investors move into other assets, the reduced dollar saw the pound as a benefactor.
Asian –Pacific Currency
USDJPY (79.80) Japan released its monthly eco data, to a mixed bag, but with investors relieved with the plan in the EU, they moved to higher risk assets, and even with the weakness in the USD the dollar was able to gain on the yen but remained in a tight range.
Gold (1605.00) regained its mystique soaring above the 1600 level on Friday to end the month much higher than expected. Gold climbed close to 50.00 during the day as investors hailed the good news from Brussels.
Crude Oil (81.00) surged on the plans from the EU, which weakened the greenback opening up the perfect play for investors, buying crude at a recent low, with low valued USD. July 1, 2012 is the commencement date for the Iranian oil embargo and markets are worried that things might kick up a bit with Iran, but so far so good.