All Eyes on EU Summit

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Market Drivers June 28th, 2012
Germans pour cold water on EU Summit
German joblessness rising for 3rd month in a row
Nikkei up 1.65% Europe -0.77%
Oil at $79.92/bbl
Gold at $1570/oz.

Asia and Europe:
AUD HIA New Home Sales 0.7% vs. 6.9%
JPY Retail Trade 3.6% vs. 3.1%
NZD NBNZ Business Confidence 12.6 vs. 27.1
EUR German Unemployment Change 7K vs. 4K
EUR German Unemployment Rate 6.7%
GBP GDP (QoQ), (YoY) 4:30 -0.3% vs. -0.3%
GBP Current Account -11.2B vs. -8.9B
GBP Total Business Investments 1.9% vs. 3.6%

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD Core Personal Consumption 8:30
USD GDP Price Index 8:30
USD Initial Jobless Claims 8:30
USD Continuing Jobless Claims 8:30

German officials poured cold water over market expectations of the EU summit by stating that it will not produce any detailed decisions but will instead try to establish a long term road map for further European integration. The news sent euro tumbling in early morning European tare and the fall was exacerbated by the weak German employment data which showed an increase in joblessness for the third month a row.

By extinguishing any hope of immediate policy action, the Germans sent the euro tumbling as market expectations of the summit sunk to a new low. It is unclear whether the German’s are staking out a tough negotiating stance in order to obtain greater control of EU member nation budgets or whether they categorically refuse the idea of debt mutualization under any conditions, but regardless of the motives the sentiment surrounding the summit is decidedly negative as market players see little chance for any meaningful progress on the integration front.

In addition to the negative rhetoric, the euro was also hurt by weak German jobless data with unemployment rolls rising by 7K versus 4K eyed. This was the third consecutive month that German unemployment has increased suggesting that the European economic slowdown is now moving from the periphery to the core and could bring growth to a halt in the second half of this year.

Elsewhere the data in UK offered little support for risk with GDP contracting by -0.3% as expected while Current Account deficit swelled to -11.2B versus -8.9B eyed. This was the second worst reading in more than 18 months suggesting that UK trade and capital account position continues to deteriorate at an alarming rate. Cable slipped along with the rest of risk FX finding support below the 1.5550 level but if risk aversion flows continue into North American trade the pair could test 1.5500 as the day proceeds.

In North America today the calendar carries weekly jobless claims and the final GDP data neither of which is likely to have much impact on trade. All eyes will be on the EU summit, with market sentiment now highly negative that policymakers will produce any meaningful coordinated action to combat the growing credit crisis in southern Europe. The shorts will eye the 1.2400 level as the first test of support with year to date lows near the 1.2300 figure looming as key point of attack if the summit ends in a complete disappointment.

Boris Schlossberg
Managing Director

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