Wrap up – last week

EU summit, Libor manipulation scandal and the US healthcare law

Prior to the EU summit, Spanish and Italian borrowing costs rose on low expectations of a credible solution to the eurozone crisis. Italian 10-year debt was sold at an average rate of 6.2%, while Spanish government bonds remained around the 7.0% level. Madrid also made an official request for an international bailout of its banks. This is likely to lead to approximately €100bn pumped into the country’s financial system. On Friday morning, EU leaders agreed to use the eurozone’s planned bailout fund to directly support struggling banks, without adding to government debt. The change will only become effective once the eurozone has created a single banking supervisor to be run by the European Central Bank (ECB). Markets reacted positively to the news; Italian and Spanish stocks soared 6.6% and 5.7% respectively on Friday, while both countries saw benchmark yields tumble.

Meanwhile, London banking stocks fell sharply on Thursday as Barclays was implicated in an alleged Libor manipulation scandal. The bank lost 11% in afternoon trading and received a fine of £290m. Deutsche Bank, JP Morgan, Société Général and UBS are some of the other banks also under investigation. Elsewhere, the US Supreme Court upheld the core components of President Obama’s healthcare law on Thursday. This is expected to have a significant impact on the healthcare sector. Following news of the decision, health insurance companies suffered a sell-off whilst hospital stocks surged, benefiting from the likelihood that they would avoid the costs associated with treating uninsured patients.

Shaping the markets – this week

ECB and BoE on the brink of further action?

On Monday, the US ISM manufacturing reading is expected to be weaker, yet still within expansion territory.

Next up, on Wednesday is the release of PMI services for Spain, Italy and the UK; the forecast is for no material change to the May readings of 41.5, 42.5 and 53.8 respectively.

On Thursday, with the intensification of the Euro crisis, the consensus is for the European Central Bank (ECB) to cut the Euro area refinancing rate by 25bps to 0.75%. After Mervyn King voted for more quantitative easing (as revealed in June’s Monetary Policy Committee meeting minutes), the Bank of England may well announce an additional injection of £50bn into the economy. Meanwhile, UK interest rates are likely to remain at 0.5%.

At the end of the week, investors will look to US jobs data for some market direction. An increase in June non-farm payrolls may be in store while the unemployment rate could fall one notch to 8.1% from May’s reading of 8.2%, however improvements in the labour market are still slow.

Finally, German industrial production in May is not anticipated to be as weak as April’s 2.2% month-on-month decline, with growth in the construction sector likely to continue given the large increase in orders over the past year.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1362.16

2.0

8.3

Dow Jones Industrials

12880.09

1.9

5.4

NASDAQ Composite

2935.05

1.5

12.7

FTSE 100

5571.15

1.0

0.0

Euro STOXX 600

251.17

1.9

2.7

Nikkei 225

9006.78

2.4

6.5

Hang Seng

19441.46

2.4

5.5

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.66

-1.4

-21.7

UK Gilt – 10 year

1.66

1.0

-32.2

German Bund – 10 year

1.60

3.0

-22.8

Japanese JGB – 10 year

0.84

1.1

-14.8

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.58

2.4

-37.6

ITRAXX Crossover 5 Year (MID)*

667.18

-12.0

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

17.08

-5.7

-27.0

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

95.44

5.4

-11.9

Gold Bullion $/ Troy Oz

1597.36

2.3

1.5

Currencies

vs $

vs £

 

¥

79.75

125.1

$

1.57

Euro

1.269

1.241

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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