Backdoor restructuring?

It’s all the rumors but it seems like the Franco-German dinner might have produced some result for today’s summit to announce. And – unlike previous attempts – it might actually work. The difference is that politicians across Europe might have understood that this is a problem of fiscal sustainability and not a liquidity. Therefore the aim seems to be at reducing Greece’s debt burden. If rumors are to be confirmed, the governments will provide 70 bln EUR and there will be a tax on euro-zone banks that is expected to generate 50 bln EUR. Those resources will be used by the EFSF to buyback the Greek debt, effectively reducing the burden and making the fiscal path sustainable (or at least offering a chance). Moreover, a possibility for the EFSF to purchase bonds on the secondary market may encourage private investors to join in and reduce credit premiums automatically reducing the pain for Italy and Spain. Now, while is all sounds good we need to wait for the solution to be accepted at the summit and for the details to be released. The official part of the summit begins at 13.00 CET in Brussels.

Should the solution be confirmed, it could well support the euro. That would match a short-term bullish technical outlook for EURUSD and EURCHF. For the EURUSD a comment from Tuesday is still valid. For the EURCHF one needs to notice that the pair managed to stay within a long-term declining channel and that means that odds of at least some inner correction have risen. The bulls might be eyeing 1,2350-1,24 but need to cope with a local resistance at 1,18 beforehand.  

China is slowing down

The good news from Europe contrast with not so good from Asia. The Chinese HSBC PMI declined to 48,9 pts. in July from 50,1 pts. signaling a contraction in the Chinese industry for the first time since Jul’10 and marking the lowest point in 28 months. The Chinese are wedged between rising inflation and declining growth (partly because of the tighter policy) but the IMF has no doubts: China should continue to tighten economic policy to prevent inflation from rising even higher. And that means that the growth might decelerate further. That should be a warning signal for industrial commodities which continued to rise despite mounting signs of a slower growth around the globe.

Events to watch – the summit, US data, European PMIs

The summit in Brussels is by far the most important event today – the working part has already begun, the official one will start at 13.00 CET (7.00 ET). In Europe we have the flash PMIs in the euro zone (3.58 ET, 9.58 CET, consensus 51,5 pts. for the industrial PMI and 53 pts. for the services one) and retail sales in UK (4.30 ET, 10.30 CET, consensus +0,5% m/m) whereas in the US the key reports include weekly claims (8.30 ET, 14.30 CET, consensus 410k) and the Philly Fed (10.00 ET, 16.00 CET, consensus +2 pts.). Wall Street is still paying attention to quarterly results with Morgan Stanley publishing the report before the US session and Microsoft after the final bell.      

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. more