Morning Meeting 10/07/12

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Good Morning.

Let' s start with an extract of what we wrote yesterday before the EU Finance Ministers' meeting:

“what is expected  to deliver this meeting? We will try to provide you the possible answer:

1. Banking union. The EU summit decided to establish a single supervisory mechanism for eurozone banks, after which the ESM will be able to recapitalise banks directly. To this end, the EU Commission will present a proposal.  Therefore the meeting will not provide any new information.

2. Spanish bailout. The second key area is the implementation of the Spanish bailout. It has already been said that without the Troika assessment there will be no new steps ahead.

3. Financial backstop. The EU leaders affirmed their commitment to use the EFSF/ESM to stabilise markets using the ECB as an agent.The Eurogroup is expected to reach a decision on the conditions required to trigger the interventions on 9 July.

Expectations are for the meeting to provide more specific guidance on the exact procedure a country asking for support should follow, including the timeline and the decision-making process.

Due to the large number of divergences that are coming out reading the newstape, it will be really tough to reach an agreement and we will see everything postponed to the 20th of July meeting.”

Let's analyze these pin-points:

1. Euro officials continued to spar over the timetable for the setup of a single banking supervisor that would make a switch to direct recapitalization possible. The European Commission which proposes European laws, expects to “have this in place by year- end,” Financial Services Commissioner Michael Barnier told a European Parliament committee.

Other officials have said the second half of 2013 is more likely. Germany's Schaeuble said “it will take time, it's complicated, it isn't easy to do.”(Bloomberg news reports)

2. Spain's new deficit target for 2012 should be 6.3% of gross domestic product, compared with a prior target of 5.3% of GDP. The 2013 deficit target would be 4.5% of GDP, and the 2014 goal would be 2.8%.

Thirty billion euros will be lent by the end of July with the goal of eventually using the euro-area bailout fund to recapitalize the banks directly instead of increasing the debt burden on the Spanish government shoulders. The initial amount will be used to meet urgent needs in the Spanish banking sector as per Junker press conference.

3.“This ESM today should be in action, and it is not and we do not know when it will be in action,”Ewal Nowotny, Austria's representative on the ECB council, said at a panel discussion in Brussels. “This is of course something that tends to undermine the credibility of the decisions that we take at summits.”

Italian Prime Minister Mario Monti, who doubles as finance minister, pressed his case for steps to reduce Italy's bond yields, whether using the euro bailout fund or the ECB. (Bloomberg news reports) But there was any news to the matter.

At this point is important to re-pointing out that  until the ESM gets going Europe's defense will be limited to 240 billion euros left in the temporary EFSF, set up in May 2010.(The 500 billion-euro ESM has been thwarted by a German constitutional challenge and ratification delay, today the final vote is expected, for more detail have a look at yesterday European Closing Thoughts)

We headed into the meeting with very low expectations, in our view at least a bit of time has been bought for Spain.

The Eur/$ cross reaction (it traded at 1.2285$ or -0.22%) was tempered by Chinese trade data, which added signs of slowing economic growth. China's imports rose less than anticipated in June while export growth slowed, data from the customs bureau showed today.  China's Shanghai Composite Index traded down 0.53% to 2,159.33, Hong Kong's Hang Seng Index down 0.30% 19,369.71, also Japan's Nikkei came off earlier highs but managed to  stay around the flat line to 8,887.46 or -0.10%.

Rising concerns about the Chinese landing path are putting pressure on already weak markets world wide, at this point in time a quick answer is needed:

• European Central Bank President Mario Draghi signaled the bank may be open to another interest-rate cut if the economic outlook warrants it, when he addressed lawmakers in Brussels yesterday. Bloomberg news reports
• Three top Federal Reserve policymakers on Monday laid the groundwork for a third round of bond purchases, saying the U.S. recovery was weak and unemployment far too high. Reuters reports

Will it be enough to bring investors back into the stock market? The European answer is just few minutes away.

Originally posted at www.77sigmatrading.com

Originally posted here...