Things I am Going to Think About on Vacation

Like others, I try to clean off my desk before my summer vacation. This year it is particularly difficult because there seems to be several unresolved issues. I will mull them over and hopefully my subconscious will have more success than my consciousness in working through the issues.

There has been a key axis in the capital markets since late last year. One side of the axis is the European debt crisis and the other side is the strength of the world’s largest economy. This axis remains in effect, even though the major currencies have reversed directions. What has changed is the news stream and how investors interpret the news stream.

TIC Data: No Significant Surprises

The May TIC report was largely in line with expectations. Foreign investors bought a net $35.4 bln of long-term assets, down from a revised $81.5 bln in April. Overall, including short-term securities, foreign investors bought $17.5 bln after a revised $13 bln in April.

Foreign investors bought Treasuries and Agencies, but were sellers of corporate bonds and stocks. Note that corporate bonds include muni bonds and the Build America Bonds, which foreign investors had been keen buyers of previously.

Euro, Rate Squeeze, US CPI and Japan Woes

The euro is center stage today. It is gaining on nearly all the other currencies today, including the Scandi-bloc, which had actually been the best performer in recent days. Technically the move above the 100-day moving average is thought to have spurred new model-driven demand.

In addition, there seems to be a squeeze being exerted by a sharp jump in European money market rates. The Sept Euribor futures contract implied its highest yield since the first week in May. The 3-month rate as reported by the EBF rose about 15 bp today to about 0.86%. The US-Germany 2-year interest rate differential has done a fairly good job of tracking the euro-dollar exchange rate over the past several quarters and that spread has widened out another 6 bp this week to stand at 20 in favor of Germany. The spread favored the US by almost 34 bp in late May. The reversal is one of the less appreciated factors behind the euro’s recovery and dollar’s slide. Over the past 29 sessions the euro has appreciated by 11 cents or 9.3%.

Dollar Remains Soft

The US dollar continues to trade heavily against the euro and yen, but it is consolidating against the other major currencies. Poor US economic data and more benign news streams from Europe continues to fuel the euro’s recovery. It is moving above its 100-day moving average for the first time since mid-Dec 09 (~$1.2917).

Ideas that China’s growth is also moderating is a key factor behind the dollar-bloc’s under performance and fueling the unwinding of cross positions against the yen. Soft Q1 CPI (0.3% q/q) in New Zealand has seen the Kiwi drop 2%. Outside the dollar-bloc, the pullbacks in the major currencies remain shallow. This suggests that the momentum traders have experienced little pain and that recent moves have more room to run.

Industrial Production Increase Misleading

The 0.1% rise in US industrial output in June seems to defy expectations for the first decline since mid-2009, but the headline is deceiving. Manufacturing, the key component actually fell 0.4%. The headline was flattered by a 2.7% jump in utility output. Utility output also jumped 5.4% in May. Manufacturing output was hurt by the cuts in auto output. The 1.9% decline appears to be a correction to the 5.6% jump in May. Excluding auto and and parts, manufacturing output was still off 0.3%.

Yen: Battle Ground--Real Investors vs Speculators

Japan's Ministry of Finance publishes portfolio flows on a weekly basis. The latest data released earlier today shows the general continuation of recent trends. Japanese investors continue to buy foreign bonds and stocks. Over the past nine week, Japanese investors have purchased roughly $87 bln of foreign bonds and $15 bln of foreign equities.

Foreign investors have sold a little less than $20 bln of Japanese shares and sold a smidgen of Japanese bonds. The net portfolio flows out of Japan have been dominated by Japanese investors themselves.

New Day, Same Story

The news stream continues to be dollar negative. The minutes from the FOMC meeting may not have been as dovish as many had expected, but the subsequent economic data has also been disappointing. The deterioration of the May trade deficit in real terms is prompting economists to lower their Q2 GDP forecasts. Some are suggesting that the retail sales report may also prompt a downward revision, but it is not immediately clear why as the core-core component (excludes autos, gasoline and building materials) which is used by the Commerce Department to calculate GDP actually rose 0.2%. The soft economic reports are set to continue today with an expected decline in June industrial output.

Dollar Offered

The US dollar is broadly lower against the major foreign currencies. The combination of Fed’s recognition of downside risks to the US economy and inflation coupled with relatively smooth bond auctions from Spain and France helped lift the euro through the $1.28 level. Sterling and the Swiss franc appeared to simply be benefiting from the softer US dollar environment. Sterling was pushed above $1.5350, it best level since late April. The yen is fully participating in the move against the dollar and is holding its own on the crosses. Japanese exporters are believed to have been the main force behind the dollar’s slippage below JPY88.

Fed Minutes Not as Dovish as Some Expected, USD Ticks Up

The minutes from the recent FOMC meeting were not as dovish as some had expected and this seems to have encouraged some profit-taking on short dollar positions.

As widely expected the Fed to cut inflation and growth forecasts, but the downgrades were not as severe as anticipated. This year's GDP forecast was trimmed to 3.0-3.5% from 3.2-3.7%. Still a 3-handle, which will seem downright optimistic to many. Next year's growth forecast was cut to 3.5-4% from 3.4%-4.5%. This year's inflation forecast was cut to 1.0-1.1% from 1.2-1.5% in April. The unemployment forecast was little changed at 9.2-9.5% from 9.1.-9.5% in April.

Euro Zone Update: Don't Stress the Stress Tests

Stress Test Update: The latest indication is that next Friday the results of the European bank stress tests will be reported in some aggregate (perhaps country level) with details for individuals banks expected in the following couple of weeks. This may disappoint those who were anticipating some closure on 23 July.

European Financial Stability Facility (EFSF): We have argued that the 750 bln euro package announced in late May was largely about shock and awe. That the third that was to come from the IMF is simply a what if throw-away number that has not basis in reality. The IMF does not make blanket regional loans. Specific countries have to apply/ make specific requests and a specific program is worked out. Another 60 bln euros was to come from the EU and that status of this is not clear. So that leave 440 bln euros for the EFSF, assuming Slovakia gives its consent. But that 440 bln euros seems to exaggerate the size too. As a German paper reports today, in order to achieve the highest rating on the bonds it may issue, the EFSF must secure greater guarantees than loan amount. The initial agreement was 20% more guarantee than loans. That would reduce the 440 bln euros to about 365 bln that can really be loaned out.

Headline Retail Sales Soft, Details Better

Headline retail sales were a bit weaker than expected with a 0.5% decline after a 1.1% decline in May. However, the weakness was concentrated in autos, gasoline and building materials, which the Commerce Dept picked up from different reports for GDP calculations. When excluded the June core-core retail sales rose 0.2% after a 0.2% decline in May. Although consumer goods imports rose in May, it does not seem to be a harbinger of stronger consumers. Most economists expect household consumption to contribute less than in Q1.

Half Full or Empty Glasses

The balance of forces continues to weigh on the US dollar. Earlier this year news form Europe was read as the glass was half empty. Now it is being understood as half full. At the same time, the earlier momentum of the US economy has stalled.

Leave aside the fact that Greece dropped plans to offer 1-year bills yesterday, the success of the 6-month bill sale, at a rate lower than the EU/IMF offer in their lending facility is remarkable. Even the downgrade of Portugal was taken in stride and today the country managed to raise a little more money in its bonds sales than it initially intended. In addition, The ECB continued to drain liquidity, helping to validate the backing up of money market rates. Yesterday’s 200 bln drain seems to have largely funds from overnight deposits, which fell to less than 53 bln euro.

Dollar Consolidates, Sterling Shines

The US dollar is consolidating its recent losses in largely uneventful activity. Sterling is the main exception to the generalization. Boosted by the firmer than expected CPI report yesterday and today’s favorable jobs report has pushed sterling to new 10-week highs against the dollar at $1.5280. The news stream and technical factors warn that the dollar’s down leg is not over. Pullbacks in the euro below $1.2700 have been shallow as it has chopped around in less than a half cent range thus far today. A move above $1.2750 may be seen as a break out and induce new buying for a move to $1.30-$1.31. For the second time this week, the dollar found the air thin above JPY89, despite continued risk-on type of activity in general.

Tomorrow's US Economic Data

There is a full slate of US economic reports on Wednesday.

The first reports are import prices and retail sales. The former typically is not a market mover. However, given the heightened concern that the US may be dangerously close to deflation, investors may be more sensitive to price data. Import prices likely fell for the second consecutive month--something that has not happened since late 2008/early 2009. The consensus forecast of -0.3% would bring the year-over-year pace to 5.3% from 8.6% in May. This would be the lowest year-over-year reading since last November.

US Q2 GDP Indications

The larger than expected real US trade deficit warns that economists may revise down expectations for Q2 US GDP. The preliminary estimate is slated for release at the end of the month. Although there has been increased talk of a double dip in the US, the risk is that even with the adjustment in expectations, Q2 GDP is very much in line with, and possibly even higher than Q1's 2.7% pace.

Consumption was important for Q1 GDP, accounting for a little more than 2% of the 2.7% increase. The pace has slowed in Q2, but may still account for 1.5-1.75 percentage points of Q2 GDP growth. Barring a significant surprise the June trade figures (estimate for Q2 GDP is due out prior to the June trade balance), the net export function likely was a drag on GDP.

Portugal Downgraded, Spain's Turn Again?

Spain's Finance Minister Salgado says the downgrade of Portugal earlier today does not put pressure on Spain. It is true as far as it goes, but of course Spain's problem transcends Portugal.

The ruling Socialists in Spain are seven seats shy of a majority and it has had to depend on smaller political parties for key votes. The economic austerity measures passed by a single vote in late May. The Catalan Party (CiU) has warned the Socialists that it will not support the 2011 budget proposals, which will be voted on in September and could threatened the viability of the government.

Moody's Downgrade, Greek Bill Auction, UK Inflation

Moody’s downgrade of Portugal was not all that surprising. The 2-notch downgrade to A1 brings it in line with the way the market already is trading it. It adopted a stable outlook. We suspect there is scope for another downgrade, which after its Q2 move to AA- still seems to be the outlier. Moody’s cited concerns about the deterioration of the fiscal situation over the medium term and questions about Portugal’s growth prospects if the structural reforms do not work over the medium term.

The euro fell on the news to the session low near $1.2522 to record a five day low. There was talk of sovereign bids ahead of $1.25, around where option structures are thought to lay. The 20-day moving average comes in today near $1.2440. The euro has not traded below this moving average since 1 July.

Push-Me, Pull-You in Global Capital Markets

The US dollar is broadly mixed as the news stream buffets the foreign exchange market. A better than expected reception to the Greek T-bill auction helped mitigate the reaction to Moody’s decision to cut Portugal’s credit rating two notches to A1. The ZEW survey captured the nature of the push/pull impulses today as the economic sentiment component was weaker than expected but the assessment of current conditions was stronger than expected.

In a similar fashion, sterling was initially weighed down by lingering disappointment, S&P maintained its negative outlook, and the RICS fell to an 11-month low only to reverse in response to slightly higher than expected inflation (3.2% year-over-year vs consensus of 3.1% and 3.4% in May). Choppy price action may continue as many participants seem to lack near-term conviction. Short-term momentum indictors warn that the foreign currency recovery may not be sustained in North America today.

Canadian Jobs Data Underscore Likelihood of Rate Hike

Canada reported incredibly strong jobs data before the weekend. Canada grew 93.2k jobs, more than 4 times more than than market expected. It grew almost 50k full time jobs. These are impressive numbers and renews expectations that the Bank of Canada will raise rates when it meets again next week, even though there have been doubts in recent weeks about the trajectory of the world economy and the US economy in particular.

Developments in Europe, Japan, and China

It is not clear if the firm dollar tone that has emerged at the end of last week and today is more than corrective in nature. It does not appear to have been associated with a clear fundamental development. There is some concern that about European bank stress tests some interest in the press reports that the BIS may have provided liquidity to a European bank via a gold swap.

Dollar Firmer

The US dollar is generally firmer against most of the major and emerging market currencies to start the new week. It has staged a reversal of sorts before the weekend and there has been follow through today. The euro ran out of steam after poking through $1.27.

Support near $1.2550 has been tested in Europe and a break could signal losses toward last week’s low near $1.2480. Weighed down by poor GDP details and dismal current account figures, sterling has broken below $1.50 for the first time since 1 July. Despite poor electoral results for the ruling DPJ, which would seem to weaken the fiscal austerity efforts, the yen is little changed against the dollar, but firmer on the crosses. Short-term momentum indicators warn that it may be difficult to sustain the dollar’s upside momentum in North America today.

Head and Shoulders Bottom in Euro?

The euro has been sold off in early North American activity. It does not appear to be news/event driven, but rather some week end profit-taking that triggered some stops. We do note that many were looking had targeted the $1.2700-$1.2750 objective. And there is a trend line drawn off of last November's high that intersects in that range today. That said, there appears to be a head and shoulders bottoming pattern carved out in the euro. The down sloping neckline comes in near $1.2400 now and violation of that would negate the pattern. The more immediate technical condition appears weak with the euro having initially moved through yesterday's highs, making a new high for the move, and then breaking below yesterday's lows. Stops now are thought to be below $1.2600 where some options structures are have reportedly been struck. Hourly momentum studies are as over-stretched as they have been this week, suggesting the odds may favor a bounce into the European close.

China, Sterling Resilience, Japan Elections

One of the key talking points today will be the fact that late yesterday’s the US Treasury issued is review of the currency market and found that while the yuan was under valued, China was not guilty of manipulation. The report was due out in April and was postponed ostensibly in anticipation that China was going to move shortly. It moved in June ahead of the G20 meeting. China’s gamesmanship yielded rewards.

Congressional leaders took exception and hearings have been promised. The Obama Administration is making a wager that this Congress will not be able to cobble together enough support to effectively overturn Treasury’s decision. However, in fairness, Treasury recognized that it is still not clear how far and how fast China will allow the yuan to adjust. It kept the door ajar as well by indicating the next review will be out in October, which coincidentally is ahead of the November election. For the record, the dollar strengthened every so slightly on the week against the yuan (CNY6.7730 from CNY6.7716 last week). The yuan has strengthened about 0.8% since the decision to break the dollar peg. No matter how much China allows the yuan appreciate it is unlikely to satisfy the critics some of whom talk about as much as a 40% misalignment. From an economic point of view, the focus on a nominal bilateral exchange rate makes little sense.

Consoldiation May be Brief in FX

The US dollar consolidating this week’s losses against most of the major currencies; trading with a firmer bias within yesterday’s trading ranges. The general forces weighing on greenback remain intact. The negative news stream around Europe’s sovereign debt crisis moderating at the same time, though that short-term rates differentials have swung against the dollar and there has been heightened concern over a string of disappointing US economic data. The yen has under performed this week, slipping almost 1% against the dollar. This reflects the unwinding of cross positions, the stabilization of interest rate differentials, return of the risk appetite and, perhaps, some concern about the outcome of this weekend’s upper house election. The Australian dollar was the best performer, gaining almost 4% against the US dollar—encouraged by supportive indications from the RBA minutes and a strong jobs report that

ECB Press Conference, Fed Action (?), European Data

The ECB press conference is the key event of the remainder of today’s 24-hour session. There are three key issues.

First, are the stress tests on European banks. Most observers seemed to share our preliminary assessment that the stresses being tested for were not particularly onerous. Although the details remain somewhat sketchy, reports suggest, for example, that the stress test will see how banks cope with a 17% draw down on Greek bonds. The recovery swaps market is pricing consistent with a 40% recovery rate—a 60% loss in a default or restructuring. It may not be politic for Trichet to say much about the stress tests, but he is likely to be asked. Note that he will be meeting with the CEOs of the top banks a couple of days prior to the July 23 stress test results are published.

Dollar Mixed But Soft Under Belly

The US dollar continues to trade with a heavier bias against the major and emerging market currencies. The yen and Swiss franc’s softer tone appears to be largely a function of the return of risk appetites, though Japan did report much weaker than expected machine orders (-9.1% vs -3% consensus). Sterling is under performing and there the weak data in the form of a drop in Halifax house price index and, while May industrial output data was better than expected there was a dramatic downward revision to the April series (-0.7% from +0,.4%). Strong Australian jobs data (45k vs consensus 15k) has propelled the Aussie sharply higher for the third consecutive session. It hit $0.8317 on Tuesday and is now near $0.8750.

More on Stress Tests

Press reports indicate that the Committee for European Bank Supervisors have revealed some details about the pending stress tests. A total of 91 banks in the EU will be tested. It appears the stress being tested for is two-fold: A 3-percentage point deviation of GDP for 2010 and 2011 from the EU's economic forecasts and a deterioration of sovereign risks beyond what was experienced in early May.

European Stress Tests--You Ain't So Tough

Some reports suggest that the stress that European banks may be tested for include a 17% loss on Greek bonds and a 3% loss on Spanish bonds German bunds and possibly French bonds will not be stressed--that is to say the stress test will not include a loss on bonds from those two.

European Banks: Pre-Stress Test

The market awaits for the European Bank Supervisors to provide more details about the stress tests. If the market has a better sense of the robustness of the stress tests it might lift some uncertainty among investors.

There are several reasons why investors are anxious. Many of these are listed here, cobbled together from various media reports. This is not meant to be exhaustive, but suggestive of some of the key issues.

Bank Stress Tests, Poor European News, China Still Likes Treasuries

The market appears to have so much to worry about that it is having difficulty choosing which to focus on. The immediate interest is on the details of the European bank stress tests. The criteria is expected to be announced by the Committee of European Bank Supervisors.

The market is keen to know if the banks are string enough not only to withstand weaker growth and higher unemployment, as was the case of the stress tests on US banks a year ago, but also if they can cope with problems rolling over current funding and a potential sovereign default. There has been numerous press reports warned that the stress test may reveal serious capital requirements. That said, officials from numerous countries seem to be playing down the risks and highlighting the relative health of their banks.

Dollar Firms, Risk Off

The US dollar is sporting a firmer profile against most of the major currencies but is largely confined to yesterday’s ranges. The yen is a main exception and been bid higher across the board as risk appetites wane. The market continues to wrestle with two main issues, the state of European bank balance sheets and the continued string of economic data warning of a loss of momentum.

The report by the Committee of European Bank Supervisors is awaited for insight into the pending European bank stress tests may be the key event of the session, underscored by the absence of first tier US economic releases. Most emerging market currencies are also under pressure today in the more risk averse environment.

Baltic Dry Index Sinks; Currency Impact

The Baltic Dry Index has fallen for the 28th consecutive session today. It is the longest decline in six years. During this swoon the index has fallen 49%. The main driver seems to be concerns about the cooling of China's steel sector. Steel is the biggest user of iron ore. Iron ore and coking coal account for more than a third of the baltic dry freight.

The correlation between the Baltic Dry Index and some currency pairs have increased marked over the past couple of months. Of note, the strongest correlation over the past two months has been with the Korean won/dollar at about 0.4. From the beginning of the year through 8 May, the correlation was 0.036.

China Update

There are several noteworthy developments from China.

The first, while still a bit sketchy, seems the most promising. President Hu seemed to signal an acceleration of infrastructure construction in the western part of the country. The top economic planning agency indicated earlier today that China will invest CNY682 bln (~$100 bln) in 23 new major infrastructure projects beginning this year. This effort follows the CNY2.2 trillion investment in 120 infrastructure projects in the 2000-09 period. The announcement seems to have coincided with the rekindling of the risk appetite and the lifting of the commodity currencies. Separately, but related, reports suggest China will cut the corporate tax for western regions to 15% from 25%.

Dolar Bears in Control, but Finding it a Bti Tougher

The market’s focus has shifted away from the European debt crisis, where the news stream seems largely benign (for the moment), and toward the more negative growth impulses coming from the US. Even though the weakness in the June US jobs report appears largely concentrated in manufacturing, the recent string of economic data has shown a loss of momentum. This coupled with the safe haven demand have depressed US yields.

Dollar Lower, Risk On?

The US dollar appears weaker across the board as New York traders return from the holiday weekend, but this is mostly a function of its modest bounce yesterday.

The greenback is near levels seen just before the weekend. The euro is slightly stronger, while sterling is slightly weaker. The dollar is a bit firmer against the yen and little changed against the Swiss franc. The dollar-bloc is having a strong showing, following strong trade figures and an RBA statement that recognized continued strength in output and inflation forecasts. The underlying tone of the dollar is soft, but the market appears to in need of fresh news and is currently appears to be looking for fresh reasons to reduce long dollar exposures.

Drivers in Q3

As we begin the second half of what has already been a challenging year, it may be helpful to consider the potential drivers of the global capital markets. As always, numerous factors have to be juggled. Now however, even though the markets are as complicated as they've ever been, there are two key drivers that stand out: the European debt crisis and the macro-economy. Each needs to be broadly conceived and the nuances understood.

European Debt Crisis

Investors are already familiar with the broad outlines of the European debt crisis and the policy response in terms of support mechanisms and austerity measures being adopted. Investors are now trying to get a handle on the next chapter in the saga. There are several dimensions of the crisis that will likely play out in the coming months.

China Looks Cheap

When China first announced on 19 June that it was going to reintroduce flexibility into its exchange rate mechanism, we advised caution; warning that it may take some time for China's intentions to be clarified. The market's euphoric response was quickly unwound as it became clear that China's position is more nuanced than it may have first seemed.

The flexibility that the US (and others) call for means the primary source of rigidity, that prevents the yuan from appreciating, namely the hand of the government, should be removed. What Chinese officials mean by flexibility is greater two way movement in relatively narrow bands.

Jobs Data To Keep Pressure on the Dollar

The unemployment rate fell to 9.5% from 9.7%, but this likely reflects people dropping out of the labor market. The work feel well 0.1%, which is the equivalent of about 300k job loss. The private sector 83k jobs and the May data were revised to show only 33k from 41k. Hourly earnings fell 0.1%. Bottom line then is few manhours of work, fewer jobs and less income.

The data is not strong enough to ease anxiety about the US economy and the losing momentum. The dollar will likely stay under pressure. The Canadian dollar and Mexican peso are also vulnerable to poor US data.

US Jobs, European Devleopments, Australia's Tax Compromise

The release of the US employment data is the main event of the day. Investors are well aware of the unwinding of the census build, which will produce a headline decline of jobs.

The market will look past this and focus on private sector jobs. The softer than expected ADP and ISM data yesterday have probably led to downward adjustment to expectations that had been around 100k at the start of the week. The private sector has added jobs in the past five months and in 6 of the past seven. To judge whether the labor market is losing momentum (which appears to be the case based on the weekly initial jobless claims), one needs to place today’s report in the context of the recent trend. Over the past five months the average private sector jobs growth was 99k and over the past 7 months its has been just below 70k. The most recent three month period has seen an average of 139k. Also note that over the past five months that the manufacturing sector has grown jobs, the average monthly pace has been a little more than 25k, which is where the consensus stands.

Global Markets Update Ahead of the US Jobs Data

The US dollar is mixed ahead of the monthly jobs data. It is generally consolidating yesterday’s losses against the European currencies and Japanese yen, while slipping against the dollar-bloc. The increased concerns about the trajectory of growth, especially in the US and China at the same time that successful bond auctions and refi operations in the euro zone generated a positive news stream provided fuel in recent days for a recovery in the euro and sterling that was already under way. Meanwhile, the unwinding of risk-on trades and the narrowing of interest rate differentials helped underpin the yen. At this juncture, it would seem to take a significant upside surprise in today’s US employment report to reverse the near-term trends.

Data Disappoints Adds to Dollar Selling Pressure

US data have been disappointing. The weekly initial jobless claim increase has been followed by a weaker than expected ISM manufacturing report. The ISM fell to 56.2 from 59.7. The consensus had anticipated a smaller decline to 59. Weakness was especially pronounced in new orders, which fell to 58.5 from 65.7 Employment eased to 57.8 from 59.8. Prices paid fell dramatically to 57.0 from 77.5.

On the other hand, construction spending was not as soft as expected. The 0.2% decline contrasts with expected for a 0.8% fall after the 2.3% jump in April, the biggest increase since 2000. Residential outlays fell 0.4% and non-residential construction slipped 0.1%. Public works rose 0.4% after 1.6% gain in April. Pending home sales rounds out the releases. They fell 30% in May, nearly twice as large of a decline as the consensus expected.

Is Fiscal Austerity Being Rewarded?

From the IMF to the G20, from bloggers to Nobel prize winning economists, there have been calls for the major developed countries to reduce deficits and stabilize debt to GDP ratios. The idea is that if this is done properly it need not retard growth and the markets will reward countries with lower interest rates requiring reducing the risk premium.

This is an important hypothesis, but so far the evidence is not compelling. In fact, leaving aside the UK for the moment, those countries that are more aggressively addressing their fiscal excesses as seeing the largest rise in interest rates. And that increase in rates is not simply something that happened earlier this year, but is continuing to take place in recent weeks.

Capital Market Developments

The ECB’s refi operations this week are being scrutinized for insight into the health of European banks. The 132 bln euro 3-month refi operation yesterday was generally heralded as favorable news. Recall that the market had been expecting between 200-300 bln euros would be needed to help smooth the expiry of the 12-month LTRO.

Today, banks took another 111 bln of six day funding. The combined total is not far from the mid-point of expectations. Moreover, upon closer scrutiny, yesterday’s refi results may not have been unambiguously good. Consider that a year ago, 1121 banks participated in the LTRO, which generated an average of 394 mln euros apiece. At the time, some suspected that even some banks that did not need the funding took it. Some 171 banks participated in yesterday’s operation and that produced an average of 771 mln euros apiece.

Capital Markets Snapshot

The US dollar is mostly lower. The euro is the strongest of the majors, gaining across the board. The week’s high was set on Monday just below $1.24 and unless this is taken out, it simply seems like range trading.

Concerns that the world economy is losing momentum continues rival the European debt crisis a key factor discouraging risk taking. Although the June purchasing managers’ surveys were generally softer than May, the drop in the China’s particularly weighed on sentiment. The stronger than expected Japanese Tankan survey failed to offset the deterioration in sentiment.