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  1. EU leaders approve the direct recapitalisation of Spanish banks via the EU bailout funds; however a single banking supervisor is required a precursor.


  1. German lawmakers are holding a special meeting to discuss what the opposition Social Democrat party sees as a government U-turn on eurozone bailouts, according to the Telegraph.


  1. Risk appetite observed across the asset classes, commodities making strong gains with a weaker USD index.


  1. Spanish borrowing cost pressures ease; Spanish 10-yr government bond yield currently at around 6.5%.


  1. RANsquawk European Morning Briefing Video:

Market Re-Cap

Risk appetite is observed across the asset classes, as markets react to the overnight news that the European leaders have agreed to allow the EU bailout funds to directly recapitalise the Spanish financial system; significantly reducing the burden on the Spanish sovereign books. Although, German Chancellor Merkel has stressed that conditionality is to apply to the funds and as a precursor, a single banking supervisor is to be established, likely to be overseen by the ECB. The risk sentiment is evident, with equities seen higher, being led by basic materials, industrials and financials. These moves have been reflected in the FX markets, with EUR/USD comfortably above the 1.2550 mark and GBP/USD making similar gains.

Pressure on Spain's borrowing costs has also eased, falling to lows of 6.4% this morning. At the North American crossover, it has come off its lowest levels and sits at around 6.5% in recent trade. With the moves being mirrored in the Italian counterpart, peripheral government bond yield spreads against the German 10-yr are seen markedly tighter, with the Bund underperforming, seen lower by around 90 ticks.

Looking ahead in the session, key data from the US is expected, with the latest update on PCE, as well as Chicago PMI due at 1330BST/0730CDT and 1445BST/0845CDT respectively.

Asian Headlines

Japanese Market/JMMA Manufacturing PMI (Jun) M/M 49.9 (Prev. 50.7)
Japanese National CPI (May) Y/Y 0.2% vs. Exp. 0.2% (Prev. 0.4%)
Japanese Industrial Production (May P) M/M -3.1% vs. Exp. -2.8% (Prev. -0.2%)
Japanese Industrial Production (May P) Y/Y 6.2% vs. Exp. 6.7% (Prev. 12.9%) (Newswires)

Chinese Industrial Profits YTD (May) M/M -2.4% (Prev. -1.6%) (Newswires)

The PBOC is to maintain prudent monetary policy and fine tune it when necessary, according to the bank's governor. (Newswires)

US Headlines

Fed's Fisher has said the Fed should not enable congress to overspend, adding that the Fed has done enough to support the economy. (Newswires) Fisher added that he would not support further accommodation unless the US faces heavy deflation. The Fed speaker added that he believes the US housing market has bottomed.

BarCap preliminary US Treasury month-end extension seen +0.02yrs

EU & UK Headlines

EU Summit Update:
-Eurozone leaders agreed to radically restructure Spain's EUR 100bln bank recapitalisation plan, allowing EU bailout funds to eventually be injected directly into teetering Spanish financial institutions, meaning Madrid can sweep the burden of the bailouts off its sovereign books. (FT-More)
-The leaders agreed it would come only after the eurozone set up a single banking supervisor to be run by the ECB. Ireland would be considered for similar treatment. The summit agreement also contained some concessions for Italy, though less than for Spain, setting the stage for Rome to become the sixth eurozone country to request EU assistance as part of the eurozone debt crisis.
-EU's Van Rompuy has said the ESM loans to Spanish banks will not have seniority. Van Rompuy added that Europe is to open up the ESM and EFSF for use in countries not currently in programs.
-European leaders are to open the bailout funds for governments meeting austerity conditions without imposing additional programs, with European finance ministers to enact the deal at the July 9th meeting.
-Italian PM Monti has said the ECB is to act as an agent for the rescue fund loans. (Newswires)

In the latest news, Spain's government is to initially get a banking recapitalisation loan, but the operation will be switched to direct recapitalisation once the ESM acquires that capability according to an official. (Newswires)

According to the latest reports, some German CDU/FDP MPs are calling for a postponement of today's vote on the ESM & fiscal treaty due to confusion over German Chancellor Merkel's possible concessions. (DPA)
German lawmakers are holding a special meeting to discuss what the opposition Social Democrat party sees as a government U-turn on Eurozone bailouts. (Telegraph)

Germany's Merkel says conditionality applies to aid from bailout funds. (Newswires) ECB will play role in bank supervision.
Access to bailout funds to be reviewed by Troika.

BoE says outlook for financial stability has deteriorated. (Newswires)
- UK bank reduction in emergency liquidity buffers could boost effectiveness of QE.
- Sees possibility of increase in defaults on commercial real estate loans.

BarCap preliminary Pan Euro Agg month-end extension seen +0.08yrs


Risk appetite has been observed throughout the European morning, indices across the continent seen markedly higher at the midpoint today. The moves are being led higher by the riskier sector, with basic materials, financials and industrials leading the way. The moves follow the overnight news that Spain's banks are to be directly recapitalised by the permanent EU bailout funds, easing sentiment towards both the periphery, and continental financials. US stock futures are seen moving in line with their European counterparts, indicating a higher open on Wall Street today.

In individual equity news, unsurprisingly, the top gainers today are primarily made up of Mediterranean banks, however one stand-out is seen in Alstom, who have signed a EUR 1bln project with Canada's Bombardier on the French Metro system, with a EUR 700mln share of the deal going to the CAC-listed stock. Alstom shares are currently seen higher by around 6% following the news.

FTSE-listed Tesco are seen lower at the North American crossover, as commentary from their AGM sours sentiment towards the stock. The company's CEO has said that Tesco's market is becoming more uncertain, and their investment plan is not always a smooth journey, concluding that changes to their UK business are urgent and vital. Tesco shares currently underperform the strong FTSE-100, currently lower by around 0.3%.


FX markets have been dominated by the positive risk appetite from the EU summit with EUR/USD gaining 150 pips in overnight trade. As price action has settled slightly from the initial euphoria the touted option expiry at 1.2600 for the NY cut has caught increasing attention with the EUR unsurprisingly supported across the board as market participants focus of the removal of the European bailout funds seniority in regards to Spanish aid. There has also been some interesting movement in EUR/CHF which hit a four week high in a relatively fast move due to market talk of a US name buying in the cross around the 1.2020/25 levels.

Elsewhere, commodity linked currencies are also large beneficiaries of the risk-on tone as spot Gold is seen up 1.8% intra-day. AUD/USD and NZD/USD are both seen with point gains and USD/CAD therefore with point losses as the USD-index is down approximately 1%. Watch for the 1.0200 level in AUD/USD which has capped the upside moves with touted large offers.

Apart from the EU summit pandemonium one thing to note is the overnight Japanese data which contained poor industrial production and inflation data. Once the European news is digested price action in the JPY may take more of an Asian focus with talk of an Asian sovereign name buying with the USD/JPY pair overnight,


WTI crude futures are trading higher ahead of the North American open following positive news overnight from the EU summit where EU leaders renounced seniority on Spanish loans and noted that banks can be recapped directly with aid funds.

Oil & Gas News:


  1. Libya's largest refinery at Ras Lanuf will not restart early July as planned, but its petrochemical unit will restart, according to senior NOC official.
  2. Iraq agreed to sign a contract with Russia's Bashneft for crude oil block 12.
  3. Exxon Mobil released 214 pounds of hydrogen sulphide after a leak at its refinery in Baytown, Texas.

Geopolitical News:


  1. Since the beginning of the year, Tehran has tried to hide the final destination of its oil exports as Western powers continue to target its energy sales in an effort to bring Iran to the negotiating table over its nuclear programme. In recent weeks, the NITC has renamed 24 vessels, more than half of its fleet, according to official shipping registries, in an effort to complicate tracking efforts.
  2. Natural gas flow from Iran to Turkey through a pipeline was cut as a result of an attack carried out by the PKK. Gas flow is expected to resume in about one week, according to Turkish energy ministry official.
  3. US Secretary of State Clinton says China and Singapore reduced Iran oil purchases.