Risk Appetite Lifted By China Stimulus Talk, But Euro Stays Soft

Risk appetite was lifted mildly in Asian session on talk that China is going to unveil a stimulus program that's over USD 300b, nearly half of the 2008 stimulus package. In addition, markets are hoping for additional reserve requirement ratio cut in Q3 and Q4, by 50bps in each quarter, plus a slightly slimmer change of benchmark lending rate cut. The talks lifted Asian equities broadly higher and helped commodity currencies recover mildly. Though, European majors remained generally pressured as the worries on Greece and Spain continued.

Market's focus are shifting to Spain for the moment as Prime Minister Mariano Rajoy stated that the government has considered using public-debt securities to fund the EUR 19B bailout of Bankia. While he said that “there will not be a (European) rescue for the Spanish banking system,” he supported measures that would allow the eurozone bailout fund to directly lend to banks. Rajoy also pledged that the nationalization of Bankia would not affect the country's budget deficit. Nonetheless, benchmark 10-year Spanish yield rose to 6.5% yesterday and drove spread over German Bunds to record 515bps. Attention will be on whether Spanish yield would march further to the so called "unsustainable" 7%.

In Greece, the election in mid-June is expected to be a war between pro- and anti-bailout parties. The latest polls showed that Greece's New Democracy party led by as much as 5.7% over Syriza. The former also ranked first in all 6 opinion polls published over the weekend. This has somehow eased market concerns that victory of the Syriza (the radical left party) would accelerate the pace of a Greek exit from the eurozone. Meanwhile, the Democratic Left party, which insisted on having Syriza included in the coalition, said that it will only back Syriza if they guarantee to stay in euro.

It is likely that Ireland will pass the European fiscal pact on the referendum on May 31 as the latest polls showed that 60% of the voters supported the deal. Unfortunately, the market anticipates that the country might not be able to tap public funding later this year as the government planned. That means, the debt-ridden peripheral country in the eurozone, despite its efforts in meeting the fiscal target and the return to growth in 2011, may need further bailout from the EU, the IMF or other international sources besides the 67.5B euro borrowed. More in Ireland's Ability to Access Bond Markets Not Certain although Fiscal Pact Likely Approved.

On the data front, Japan unemployment rate rose to 4.6% in April, household spending rose 2.6% yoy, retail sales rose 5.8% yoy. Swiss UBS consumption indicator improved to 1.41 in April. UK CBI reported sales, German preliminary CPI, US S&P/Case-Shiller house price and conference board consumer confidence will be released later today.