SCOREBOARD: European void

It was a big night for Europe. The EU summit kicked off and just before the games began, Germany's finance minister came out and said that Germany may support some form of jointly guaranteed bond but that "we have to be sure that a common fiscal policy would be irreversible and well co-ordinated. There will be no jointly guaranteed bonds without a common fiscal policy.” This is a position that Angela Merkel has articulated as well, so the Germans have made it pretty clear. You want us to bail you out? We need some guarantees we're not going to be called upon to do this ad nauseam. Fair enough and we'll see what happens. The good news is that there is something to negotiate. Indeed, Germany indicated they may support further short-term measures to get Spain and Italy's borrowing cost down – using the ESM and EFSF for the purpose.

As far as I can tell there was no real reflection of those comments in European markets outside of Spain and Italy. So Spain's 10-year bond yield, having hit a high of 6.99 per cent, then eased off back to 6.9 per cent, while Italy's 10-year yield fell 6bps to 6.17 per cent, after hitting a high of 6.28 per cent. But the major stock indexes were all weaker with the Dax down 1.3 per cent, the CaC down 0.4 per cent and the FTSE off 0.6 per cent. Even the euro is weaker, down 60 pips or so (from 1630 AEST) to sit at 1.2446.

Perhaps it's this bank probe that is hitting sentiment as well. Regulators on both sides of the Atlantic are investigating the manipulation of benchmark interest rates by global investment banks. One global bank has already announced that it would pay a settlement of £290 million, although the probe is much wider and banks across Europe were smashed. Not a great day for financial markets and you can see why many European politicians think that financial markets more broadly, are unjustifiably ‘attacking' or manipulating Spanish and Italian debt – as I mentioned yesterday there is a sense that they are the enemy and this Libor probe isn't really going to help the cause.

Otherwise, news out of Europe was good. Spain's parliament approved a €27 billion austerity budget that would help reduce the budget deficit from 8.9 per cent to 5.3 per cent this year. And the French also announced cuts to spending overnight – 7 per cent across all ministries next year, with another 4 per cent each in the two years after. All of this should help the French get the budget deficit down to 4.4 per cent from 5.2 per cent in 2011.

Over on Wall Street, there was a delayed reaction to all this good European news but it was significant. US equities spent the entire session in the red and indeed closed lower – with the S&P500 and Dow both off 0.2 per cent to 1329 and 12602 respectively. Most of the negativity had been driven by uncertainty in Europe of course, and apparently a decision by the US Supreme court to uphold Obama's health care law. Nevertheless, this hides some massive moves into the close. The SP500 for instance was actually off 1.3 per cent with an hour and a half or so left to trade – ditto the Dow. The Nasdaq otherwise ended 0.9 per cent lower (2849) while the SPI was 0.2 per cent lower (4012).

In terms of global debt markets, US treasuries pushed higher, with the yield on the 10-year down 4bps to 1.58 per cent. The 5-year yield was then off roughly 3bps to 0.689 per cent, while the 2-year yield sits at 0.30 per cent. Aussie debt futures were then up a couple of ticks to 97.7 on the 3s and 97.05 on the 10s.

In the forex and commodities space, the Australian dollar followed the euro lower, falling 60 pips to be at 1.0041. Sterling then is at 1.5516 and yen at 79.45. Otherwise gold had a decent fall, off some $26 to $1552, then copper was 0.3 per cent lower and crude fell 2.1 per cent to $78.49.

All the data out last night took a back seat, and markets largely ignored it. The final estimate of US first quarter GDP came in as expected at 1.95 (uncaged) although consumer sending was revised up to 2.3 per cent, from 2.1 per cent. German unemployment was then steady at 6.8 per cent in June. Finally, US jobless claims were at 385,000 in the week to June 23 from 392,000. There were a few other minor points but that is the major stuff for last night.

The calendar today contains a bit of Australian data – private sector credit for May, and there are a few data points for Japan as well – as well as industrial production and CPI. Tonight we get eurozone CPI, the UK's index of services and then personal income and spending data for the US. The final estimate of Michigan Uni's consumer confidence index for June is also released.

Have a great weekend.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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