The US dollar is mostly slightly firmer as North American dealers return
to their posts. Ideas that the UK Tories are getting close to a deal with the DUP appears to be lending
sterling a modicum of support, as it tries to extend its uptrend into a fourth
session. The Japanese yen is the weakest of the majors, rising equities, and yields, spurs the dollar to
re-challenge last week’s high near JPY111.80.
The way it which Italy has decided, with the EC’s permission, to close
the two regional bank at a not insignificant cost to taxpayers was widely
criticized in the media and by analysts. Italy’s second-largest bank, Intesa got a sweetheart
deal. It is able to take over the
failed banks assets, but not liabilities as had been the case recently in
Spain. It was also given around 400 mln in guarantees in case some of the
asset sour. It was granted about 4.8 bln euros to maintain its capital
ratios. Senior bondholders and
depositors were kept whole.
It is important to recognize that this is not a case of Italy ignoring
the new rules about the resolution of
troubled banks. Italy exploited a loophole,
and the EC approved. Italian officials argued that state aid was necessary
to avoid economic disturbances in Veneto. The fact that the banks were
not systemically significant also allowed greater flexibility.
The markets have initially
responded favorably. Italy’s 10-year government bond yield is off three
basis points today, which is the most in Europe outside of Greece, which was
upgraded by Moody’s before the weekend. Despite the lack of debt
relief from the official creditors, Greece is still exploring a return to the
capital markets. That is essential if a fourth aid package when the
current one ends in a year is to be avoided.
Italian equities have rallied, and
the FTSE-Milan Index is up 1.4% to the lead the major bourses higher.
The Dow Jones Stoxx 600 is up half as much, led by consumer staples and
financials. The bank shares sub-index is up 1.3%, to snap a
four-day drop. Italy’s All-Share Bank Index is up 3.3%, the
most since Macron’s first round victory in the French presidential election in
late April.
Separately, Berlusconi’s Forza Italia and the far-right parties did well
in the second round of local elections. It won captured the
governance of several cities including Genoa and Verona. The
revival of Forza Italia is important. The PD and Five-Star Movement
were both polling around 30%. This left Forza Italia and far-right parties,
including the Northern League, dividing up another 30%. Mutual political
interest rather than ideological goals pull the forces together.
Meanwhile, the economic news of the day, the German IFO survey failed to
excite the market. The survey was better than expected. The
overall assessment of the climate ticked up to 115.1 from 114.6. It is
the highest level since at least 1991. The evaluation of current
conditions rose to 124.1 from 123.3. This
is also the highest reading in at least 26 years. The expectations
component rose to 106.8 from 106.5. It is a three-year high.
Although we do not often look at it, and Bloomberg does not report it,
the IFO service survey slipped to 13-month lows. This gives one the sense that the weakness of
the euro, relatively speaking, boosts Germany’s trade sector, which is about
goods more than services. Also, importantly, the euro may have initially
ticked higher the headline news, but has come off after meeting offers near the
pre-weekend high of $1.1210. There is a 525 mln euro option struck at
$1.12 that is cut in NY today. Initial support is seen near $1.1175, and it may take a break of the
$1.1140-$1.1150 area to be at all noteworthy.
Oil prices are higher for the third session. Recall that the August
light sweet crude oil contract closed lower for the fifth consecutive week, but
the downside momentum had begun easing after the middle of the week. The
general pattern holds for Brent as well. The technical indicators warn
that the market is over-extended and a further bounce is likely. We look
for a move toward $44.00-$44.50 after closing near $43 before the
weekend.
The US reports durable goods orders for May. The details of the
preliminary report (orders excluding aircraft and defense orders, and shipments
of the same) are expected to be better than the headline, which probably fell
for the second consecutive month. Recall that durable goods orders rose
an average of 0.6% in Q4 16 and 1.3% in Q1 17. If durable goods orders
fall 0.6% as the median forecast in the Bloomberg survey suggests, then the
average for the first two months in Q2 would be -0.7%.
The Fed’s Williams has already spoken today (Sydney) and appeared to
align with the Fed’s leadership, sticking with the need for gradual rate
increases, and willing to look past the recent decline in core inflation
measures. Tomorrow there is a flurry of Fed speakers, including
Yellen, and the sole dissent at the last two hikes, Kashkari also speaks tomorrow.
Later today, the ECB’s forum will hear from Draghi, Carney, and
Kuroda.