- BIS is concerned that central banks’ remaining options to aid the economic recovery are limited. BIS also calls for a pan-European banking system.
- Greece is aiming for a two-year extension of the EU/IMF deficit targets.
- Market attention is likely to centre on speculation about the potential outcome of the EU Summit on Thursday/Friday. The main release today is US new home sales.
The Bank for International Settlements (BIS) published its annual report on Sunday. In it, it says that “central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.” BIS is concerned that central banks’ remaining options to aid the economic recovery are limited while the political leaders’ efforts fall short of what is needed. In line with what has previously been communicated by Bundesbank President Weidmann, BIS said that the strong monetary policy response had reduced incentives for politicians. BIS also called for a pan-European banking system, see also Bloomberg.
Greece is hoping for a two-year extension of the memorandum deficit targets. The Troika was set to return to Athens today, but health problems for both the prime minister and the finance minister will delay the return. The re-negotiation of the memorandum is expected to commence in the coming weeks, see WSJ.
The press briefing following the Rome meeting on Friday had a limited market impact. Merkel, Hollande, Monti and Rajoy agreed on growth initiatives amounting to EUR 130bn, but we will have to wait for the Summit at the end of the week for further details, see FT. The pan-European banking union was discussed but it is not clear whether Germany is ready to accept this and how fast the political leaders intend to move forward on this issue. Also whether the EU rescue funds should be used to intervene in the market is being debated. See also FT article for a summary of the main contents of the draft proposals that has been circulated to member states ahead of the summit.
On Friday afternoon, the ECB released details on how it will broaden the eligible collateral base. The council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities such as auto loans and residential mortgage-backed securities, see ECB press release.
Risk appetite improved slightly on Friday in the US session with US equities ending the trade in positive territory. The S&P500 ended the trade up by 0.7%. The S&P future has decreased slightly in the Asian trading this morning. In Asia, stock indices are trading with no clear direction. US bond yields increased on improved sentiment, sending 10-year Treasury yields above 1.67% on Friday. In FX markets, the EUR/USD traded sideways on Friday evening and is broadly unchanged around 1.254 this morning.
Global Daily
Focus today: For once we have a thin global calendar today. Spain is expected to send a formal aid request to the EU today. This is likely to be a non-event as the Eurogroup has already communicated that it would welcome this request and the size of the aid facility of up to EUR 100bn has already been communicated, see FT. ECB’s Asmussen will speak in Frankfurt this afternoon on the topic “Stability guardians and crisis managers: central banking in the crisis and beyond.” Potential signals of the possible ECB crisis response at the July meeting is likely to attract market attention. This week’s main event is the EU Summit at the end of the week and speculation about the potential outcome is likely to dominate newsflow this week. Data on US new home sales is the only important release in the global calendar today.
Fixed income markets: The main driver for fixed income markets this week is surely the EU summit on 28/29 June. It is expected that some sort of agreement by the European leaders to move forward in forming a banking union will be reached. However, we do not expect any details in that respect. The markets will be looking for leaks ahead of the meeting and sentiment is likely to be nervous. There are two-sided risks, and we advise a cautious stance going into this week.
FX markets: The so-called IMM or CFTC data released on Friday night showed that speculators in the week ended June 19 squared out FX positions ahead of the FOMC meeting last week. In particular, stretched short positions in EUR, AUD and NZD against the US dollar were squared out, probably reflecting a risk of rally in these currencies in case FOMC had introduced QE3 last week. Hence, these currencies might be vulnerable (room for new short positions) if the weak risk sentiment continues this week ahead of the all important EU Summit on 28-29 June. A significant drop in short CHF positions might reflect that the FX market is increasingly concerned about the European debt crisis and that investors are desperately looking for alternatives to the euro. The relatively strong performance of the Scandies last week might reflect the same phenomenon.
Today, there is little for the market to trade on. But, as has been the case for quite a while, the forex market will continue to follow Spanish and Italian yield spreads closely. Not least Italy could be the next focal point and quite negative for the euro if that turns out to be the case.
Scandi Daily
There are no major market events in Scandinavia today. 
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