Merkel Crushes EU Summit Hopes, US New Home Sales

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The U.S. dollar is starting the week higher against all of the major currencies, which tell us that investors are nervous about the EU Summit and the ability of EU leaders to send a convincing message to the market that a fiscal union is in the works. This skepticism is not misplaced considering that German Chancellor Merkel continues to oppose sharing sovereign credit risk, which is the only thing that could end the crisis. This morning in Berlin, she blamed the euro debt crisis on Europeans living beyond their means and crushed everyone’s hope for a ground breaking announcement on Friday by saying that sharing euro-debt burden is counterproductive. Merkel left no room for ambiguity when she rejected joint euro bonds and bills and joint deposit insurance if it means joint liability. Unless the Germans soften their stance on burden sharing, this week’s EU Summit could turn into another major disappointment for the EUR/USD. While Angela Merkel will be heavily outnumbered at the EU Summit, she controls the purse strings and without her nod of approval, Europe will not be able to get the clear roadmap that it needs to reverse the vicious cycle that pushed so many nations into begging for a bailout. Along these lines, Spain formally requested aid to recapitalize its banks this morning, sending Spanish 10 year bond yields higher. If the Germans refuse to budge at all, we expect the EUR/USD to remain under pressure throughout the week into the EU Summit.

U.S. new home sales were the only piece of somewhat important economic data on the calendar today. According to the latest report, new home sales rose 7.6 percent to 369k in the month of May. This was the highest amount of homes sold since Nov 2009. The supply of new homes also dropped to its lowest level since October 2005. While this data is very encouraging, it is important to realize that inventory is only moving because prices are dropping. The recovery in the housing market is expected to continue to lag the recovery in the broader economy and for this reason the improvement in new home sales will not soften the case for QE3.

Kathy Lien
Managing Director

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