Quick Word on Price Action

The EU Summit results are the main driver of the capital markets.   Expectations had rightfully been depressed.  The fact that it appears that Germany and the creditors blinked caught the market leaning the wrong way.  

Secondarily, the softness of the US personal consumption in May and the back month revisions of real PCE (implied too by the GDP revisions) warns of relatively sharp downward revisions in economists' forecast for Q2 GDP.  Personal consumption was previously expected to rise 2.3% in Q2.  The current pace, even assuming a slightly better PCE figure for June would put personal consumption at a little more than half the previous expectations.  This could see GDP forecasts cut to around 1.5%.

  

This combination of events--the measures in Europe and the stalling of the US economy--coupled with market positioning suggests additional pullback in the US dollar is likely.  

Participants should be prepared for the euro to retest the $1.2790-$1.2820 area.  Sterling may face some resistance in the $1.5730-50 area, but a return to $1.58 should not be surprising.  The Australian dollar is leading the way and has made new highs for the month.  With the RBA on hold next week and interest in the Aussie as a reserve asset (even at the BBK and SNB), the Australian dollar could advance toward the $1.04-$1.05 area.  

It is difficult to get too excited about the yen.  However, with the move in the other currencies, the dollar could trade higher against the yen.  The JPY79 area looks to be a sufficient base to launch another run toward JPY81.00.  

The biggest winner from the EU Summit is not Spain, Italy and France, who seemed to out maneuver the foxy Merkel, though they did not fare poorly.  The biggest winner is Ireland.  At pixel time, the Irish 10-year benchmark bond yield is off 73 bp, while Italy and Spain have seen their benchmark rates fall 34 and 45 bp respectively.  

Two year yields have fallen even more as the curves flatted after steepening in recent weeks as the crisis grew more intense.  The Irish 2-year yield is off 100 bp (to 4.45%), while Spain's 2-year yields is down 93 bp and Italy's 2-year yields is off 65 bp.  

Investors suspect that a large portion of Ireland's bank debt can be removed from the sovereign's balance sheet as a consequence of the agreement at the summit.  This will in turn allow Ireland to return to the capital markets next year as planned.  It may be the first country to receive aid to return to the capital markets.