SNAPSHOT:
-Euro back above $1.24; Treasury yields off record lows; stock futures in positive territory; ICE July Brent up 50 cents at $103.98, Nymex July crude up 33 cents at $88.15; spot gold +0.1% at $1,563.56
-Watch for: ADP payrolls, weekly jobless claims, 2nd estimate GDP
Top News: ECB’s Draghi Calls For Banking Union; Euro Faces Disintegration Without Action, Says Rehn; Italy’s Monti Warns Germany On Austerity Backlash
MARKETS OUTLOOK:
FOREX:
In the European foreign exchanges, the euro was recovering against the dollar and by 0410 ET, was trading at $1.2405, from $1.2366 late Wednesday in New York. The dollar was at Y78.85 from Y79.05.
Swiss National Bank Vice-President Jean-Pierre Danthine reiterated Thursday that while it will enforce its floor of 1.20 Swiss francs per euro with utmost determination, the measure is easing the deflationary and recessionary risks facing the country.
“The minimum exchange rate has decreased the deflationary and recessionary risks associated with a massively overvalued currency,” Danthine said Thursday in a text prepared for delivery at a banking conference.
BONDS:
U.S. Treasurys edged lower in London trade as bond markets took a breather after fears about the euro crisis Wednesday pushed Treasury yields to record lows across most of the curve. Although euro-zone jitters are unlikely to fade for long, U.S. ADP payrolls data should provide some distraction ahead of Friday’s key nonfarm payrolls report, while GDP growth in the first quarter is expected to be revised down to 1.9% from a previous estimate of 2.2%. At 0452 ET, June Treasurys were down at 134.150, while the 10-year cash yield was 1.65%.
The president of the Federal Reserve Bank of St. Louis, James Bullard, said Thursday that European policy makers must offer “vision and rapid action” to prevent the crisis in Europe from turning into “a major meltdown for the world economy.”
“It’s a grave situation indeed,” Bullard told reporters in Tokyo after attending a conference hosted by the Bank of Japan, as deepening worries about the financial woes in Europe rocked Asia’s financial markets Thursday.
The European situation “is driving U.S. and Japanese equity markets down,” he said “It has also caused a tremendous flight to safety, which has sent government bond yields here (in Japan) and the U.S. and in Germany to record lows.”
The cost of protecting European corporate debt against default fell in trading Thursday amid positive euro zone inflation data and European Central Bank President Mario Draghi calling for a banking union.
At around 0555 ET, the iTraxx Europe index, which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was at 173/174 basis points, three basis point tighter from the close on Wednesday.
The Crossover index of 40 mostly sub-investment-grade European corporate borrowers was 12 basis points tighter at 706/710 basis points.
EQUITIES:
U.S. stocks are poised to rebound Thursday, boosted by a firmer session in Europe and recovering euro which has helped appetite for risk, despite ongoing concerns about Spain.
“However, equity markets look vulnerable to further selling as investors become increasingly concerned at the crisis enveloping the euro zone,” said Fawad Razaqzada, strategist at GFT Markets. “Money continues to pour into U.S. Treasurys, German Bunds, UK Gilts and Japanese government bonds.”
In Europe, the Euro Stoxx 50 was up 0.8% at 2133.65, extending gains in a modest recovery following previous session losses, though concerns about Spain persist. Though markets are higher Thursday, “in the absence of decisive action to stem the rot in the euro zone, sellers should reconvene soon enough,” warned Interactive Investor.
COMMODITIES:
Investors shouldn’t read too much into gold’s rally Wednesday, said David Govett of Marex Spectron. “These moves are symptomatic of a market that has no real direction and is being moved on the back of very little,” he said, attributing the rebound mostly to technical and momentum-driven trade. “There is still very limited physical demand or fund business in the market and until this changes, expect the current pattern to continue,” he added. Sees range-trade between $1,525/oz and $1,600/oz continuing “for the time being.”
A report due later on U.S. crude oil inventories, delayed by a day due to Monday’s public holiday in the U.S., is likely to report a 0.5 million barrel build to total U.S. crude inventories, said Andrey Kryuchenkov, vice president of commodities research at VTB Capital. This build, due to rising imports, will be small and likely countered by higher U.S. refinery utilization rates which are holding above 88% capacity. VTB expects oil trading to be choppy in line with the broader markets.
Weighing on the single currency Wednesday—and, by extension, dollar-denominated metals like gold–are renewed fears over the state of the Spanish economy and its banking system.
=======TODAY'S CALENDAR=======
ET PERIOD
0730 US May Challenger Job-Cut Report
0800 US Cleveland Fed President Pianalto
speech
0815 US May ADP National Employment Report
0830 CAN 1Q Balance of Payments
0830 CAN Mar Payroll employment/earnings/hours
0830 US 1Q Preliminary Corporate Profits
0830 US 1Q 2nd estimate GDP
0830 US May 26 Unemployment Insurance Weekly
Claims Report
0945 US May 27 Bloomberg Consumer Comfort Index
0945 US May ISM-Chicago Business Survey
1000 US May 19 DJ-BTMU U.S. Business Barometer
1030 US May 25 EIA Weekly Natural Gas Storage
Report; Weekly Petroleum Status
Report
1200 US May ICSC Chain Store Sales Trends
1300 US May Dow Jones Economic Sentiment
Indicator
1500 US May Agricultural Prices
1630 US May 30 Discount Window Borrowings
1630 US May 21 Money Stock Measures
1630 US May 30 Foreign Central Bank Holdings
==============================
TOP STORIES OF THE DAY:
Euro-Zone Inflation Slows
The rate of inflation in the euro zone slowed more than expected in May, giving the ECB more breathing space to loosen its monetary policy stance.
Italy’s Monti Warns Germany On Austerity Backlash
Italian Prime Minister Mario Monti calls on Germany to think and react to a mounting popular backlash against rapid fiscal consolidation in some euro-area countries.
ECB’s Draghi Calls For Banking Union
ECB’s president calls on politicians to come up with a vision for the euro zone for the years ahead, with greater centralization of financial sector regulation as the first possible step.
Euro Faces Disintegration Without Action
Euro-zone countries must act to bring down borrowing costs and improve its ability to deal with contagion if it is to survive the ongoing crisis, warns the EC’s Olli Rehn
IIF Says Spain Too Big For Debt Restructuring
Head of the Institute of International Finance believes that Spain’s sovereign debt load is too big to have the private sector participate in a potential restructuring.
EC Proposes Euro-Zone Banking Union
The 17 countries that use the euro should set up a “banking union” that allows them to share the burden of bank failures, the EU’s executive arm says.
Spain Mulls Staggered Bankia Capitalization
Spain is considering a staggered capitalization of ailing bank , with only a partial injection in the near future to allow the bank to cover its financial needs as they arise.
German Jobless Rate Hits Low
Germany’s seasonally adjusted jobless rate fell to a record low in May, underlining the nation’s resilience to the worsening debt crisis in the euro zone.
Irish Jobs Data Sharpens Austerity Debate
Irish government data showing the country’s unemployment rate remaining stubbornly high fueled opposition to the new EU fiscal treaty as Ireland prepared to vote on it.
Graff Diamonds Pulls IPO
London-based Graff Diamonds will postpone its $1 billion initial public offering in Hong Kong owing to adverse market conditions.
China Urges US To Respect Beijing’s Interests In Asia
Beijing urged the U.S. Thursday to respect Beijing’s interests in the Asia Pacific, as U.S. Defense Secretary Leon Panetta began a visit to the region aimed at shoring up U.S. naval power.
-By Paul Larkins, Dow Jones Newswires; 4420-7842-9319; paul.larkins@dowjones.com
(END) Dow Jones Newswires
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