LONDON: Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.
1/ PUBLISH....AND BE DAMNED?
Full details of what European bank stress tests will assess are not yet clear but the European Commission's push for a "sovereign debt shock" to be among the scenarios and the larger number of banks that will be tested go some way to addressing markets' initial concern about the robustness of the conclusions that will be reached. Results for some of the biggest banks will be given to EU finance ministers on July 13 but leaks or announcements before then, especially on German landesbanks or the Spanish cajas, will have scope to rattle markets at a time when volatility has risen. Given that banks which are in good health have a strong incentive to make that known, market pressure to publish more results will only grow.
2/ RESULTS ARE NOT ENOUGH
Equity markets are heading into the earnings season with more ambivalence than might seem warranted given the prospect of fairly good second quarter results. Corporate guidance will be important as will the impact of planned fiscal austerity and increases in VAT or personal/corporate taxes in determining which sectors and firms to pick. But the strong outperformance of gold and Treasuries in the first half is signaling concern about the economic outlook which may not yet be fully embedded in equity markets. While the latest Reuters asset management poll showed investors cut equity holding in June, they are still somewhat overweight stocks relative to their benchmarks, leaving scope for exposure to stocks to be cut further.
3/ TRICKY TIMES
Moody's may be playing catch up with other ratings firms by putting Spain on review for a potential downgrade from its triple-A rating but it has nevertheless refocused investors' attention firmly on the euro zone's sovereign debt risks. If peripheral euro zone yield spreads resume their rise, it will raise the stakes (and the cost of funding) for Greece, which plans to tiptoe back into the market with a Treasury-bill sale later in July. Any hiccups will make it even more important that outstanding wrinkles are ironed out regarding the European Financial Stability Facility that was set up to help any euro zone member that was cut off from market financing.
4/ ROLLING OVER
Euro Libor rates are rising, and the resulting tightening of money market conditions may be happening too rapidly for the liking of some. Whether the ECB is in this camp will become clear at its post-policy meeting news conference on Thursday, its first opportunity to show how comfortable it is with the (reduced) amount of excess liquidity in the system. The amount of money rolled over from 2009's first one-year tender into three-month and six-day tenders reflects the premium that some banks are having to pay to raise funds in the open market given the ECB is charging more than the average cost for top-rated names. But it was also a function of carry trades that were in favor a year ago -- borrow money from the ECB at 1 percent and buy euro zone peripheral debt for a pickup of several percentage points -- becoming far less attractive now that peripheral euro zone sovereign credit risk has to be taken into account.
5/ FX TESTS
While the push up in euro Libor rates will make it more expensive to use the euro as a funding currency for carry trades, this may not be the most important consideration for euro bears if bank stress tests and/or money market signals exert renewed pressure on the financial sector. Which currency is the easiest to push the euro down against may come down to a test of official tolerance thresholds in a couple of other major currencies -- traders are pushing the Swiss franc ever higher to see when the SNB steps back into the fray and may start doing the same with the yen. - Reuters
1/ PUBLISH....AND BE DAMNED?
Full details of what European bank stress tests will assess are not yet clear but the European Commission's push for a "sovereign debt shock" to be among the scenarios and the larger number of banks that will be tested go some way to addressing markets' initial concern about the robustness of the conclusions that will be reached. Results for some of the biggest banks will be given to EU finance ministers on July 13 but leaks or announcements before then, especially on German landesbanks or the Spanish cajas, will have scope to rattle markets at a time when volatility has risen. Given that banks which are in good health have a strong incentive to make that known, market pressure to publish more results will only grow.
2/ RESULTS ARE NOT ENOUGH
Equity markets are heading into the earnings season with more ambivalence than might seem warranted given the prospect of fairly good second quarter results. Corporate guidance will be important as will the impact of planned fiscal austerity and increases in VAT or personal/corporate taxes in determining which sectors and firms to pick. But the strong outperformance of gold and Treasuries in the first half is signaling concern about the economic outlook which may not yet be fully embedded in equity markets. While the latest Reuters asset management poll showed investors cut equity holding in June, they are still somewhat overweight stocks relative to their benchmarks, leaving scope for exposure to stocks to be cut further.
3/ TRICKY TIMES
Moody's may be playing catch up with other ratings firms by putting Spain on review for a potential downgrade from its triple-A rating but it has nevertheless refocused investors' attention firmly on the euro zone's sovereign debt risks. If peripheral euro zone yield spreads resume their rise, it will raise the stakes (and the cost of funding) for Greece, which plans to tiptoe back into the market with a Treasury-bill sale later in July. Any hiccups will make it even more important that outstanding wrinkles are ironed out regarding the European Financial Stability Facility that was set up to help any euro zone member that was cut off from market financing.
4/ ROLLING OVER
Euro Libor rates are rising, and the resulting tightening of money market conditions may be happening too rapidly for the liking of some. Whether the ECB is in this camp will become clear at its post-policy meeting news conference on Thursday, its first opportunity to show how comfortable it is with the (reduced) amount of excess liquidity in the system. The amount of money rolled over from 2009's first one-year tender into three-month and six-day tenders reflects the premium that some banks are having to pay to raise funds in the open market given the ECB is charging more than the average cost for top-rated names. But it was also a function of carry trades that were in favor a year ago -- borrow money from the ECB at 1 percent and buy euro zone peripheral debt for a pickup of several percentage points -- becoming far less attractive now that peripheral euro zone sovereign credit risk has to be taken into account.
5/ FX TESTS
While the push up in euro Libor rates will make it more expensive to use the euro as a funding currency for carry trades, this may not be the most important consideration for euro bears if bank stress tests and/or money market signals exert renewed pressure on the financial sector. Which currency is the easiest to push the euro down against may come down to a test of official tolerance thresholds in a couple of other major currencies -- traders are pushing the Swiss franc ever higher to see when the SNB steps back into the fray and may start doing the same with the yen. - Reuters
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