Overnight there's been more rumors of the PBoC cutting their RRR for banks, although the PBoC has made no such statement, it has been suspected that the PBoC will move to cute the Reserve Ratio soon, this chatter has been going around the wires for at least 3 weeks.
Europe had been relatively quiet overnight, volumes were thinner as news flow was light and the summer months are upon us. Italy did see their 10 year debt break the 6% level which is the threshold that sent Greece, Portugal and Ireland all looking for bailouts as 6% is unsustainable and locks countries out of the debt issuance market; this is why Spain is extra scary as its 10 year debt is often seen above 7%.
There was a Euro-group Finance Minister's conference call on Spain today; the already approved Spanish banking bailout of $100 bn euros has been approved again, however the exact amount will probably not be known until September when the results of a bank by bank stress test are released. The market is interested in whether or not the Fin Mins will approve a $30bn euro release to Spain by the end of July as originally set out in the proposals. If that is to happen, then there may also be some news on the terms of the loan, thus far details from the tele-conference have been light. Spanish 10 year debt is at 7.21% today, Italian at 6.10%. Why?
Just as all of this was coming out from the tele-conference, news broke that the Spanish region of Valencia would be the second region to need a government bailout, Catalunya announced need for one in May, however Montoro said no such request had been made by Valencia, to only back track on that statement. Remember when the Fin Mins first approved the Spanish banking bailout and thought the market would respond well, and we pointed out that Spanish sovereign debt would be subordinated to the banking loan and this would likely send Spain in to a full blown sovereign debt crisis rather than just a banking one? Well here are the initial signs of such a crisis brewing, all because of the typical EU summit grand plans with no details that always do more damage than good. The EUR/USD plunged on the news.
To make matters worse, the ECB declared today that Greek bonds are no longer suitable as collateral. I'm not going to get in to the many scenarios this may be setting up including a Greek exit as the watering hole just ran dry.
As for Euro-Dollar and ES on this night that started out quiet and seems to be ending with quite a bit of noise, moving the market in the expected short term direction....
Market updates on the way...
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