European banks and England fans in line for stress test

Another very quiet session to round off the week in Asia. We saw a bit of risk-averse trading early in the session, which has been the typical play on Friday’s as traders avoid risk heading into the weekend. This mood has eased and most pairs are closing the session near their opening levels. Cable fell as low as 1.4645 but improved to a high of 1.4857 post solid UK retail sales figure out yesterday. Sales rose 4.4% as electrical retailers enjoyed increased sales ahead of the World Cup football tournament. In addition to strong sales, vehicle production increased by 59% suggesting that the economic recovery from recession is continuing for a third quarter.

In European news The EU announced yesterday that they will publish the results of stress tests on the top 25 EU banks in July in an attempt to boost investor confidence and calm market volatility. The testing has been led by France and Spain as they look to copy the US’s similar exercise last year which saw an increase in risk appetite and reduce overall fear about a possible default. However this could be a double edged sword as positive results will provide confidence to the markets but a negative outcome would only support Europe’s woes and may lead to further bailout from governments and the IMF.

Spain successfully held a €3.5 billion debt auction yesterday but at an expensive price of 4% for a 10 year coupon bond. This was coupled with an additional €479 million worth of 30 year bonds with a 4.7% coupon value. A welcome boost for Spain as their Treasury had expected to sell in the region of €2.5-€3.5 billion. This maintained the recent Euro rally and currently stands at GBPEUR 1.1980 and EURUSD at 1.2386.

In the US yesterday CPI fell 0.2% m/m in May, following a 0.1% decline in April. On an annual basis, CPI rose 2% in May (not seasonally adjusted). For the second consecutive month, the downward pressure on CPI was driven by a decline in the energy index. In May, the energy index fell 2.9% m/m (after falling 1.4% m/m in April), with most of the decline coming from gasoline. The index for food remained unchanged, while the index for all items less food and energy (core CPI) posted a weak 0.1% gain in May, only the second increase in 2010.

To conclude this weeks trading we have better than median forecasts for PSNCR 20.25 bln and PSNB at 18.0 bln, May M4 money unchanged m/m, +2.8% y/y, weaker than median forecasts +0.2%, +3.2% respectively. Finally, a boost for the housing market with Mortgage approvals up 51,000 in May vs 48,000 in April compared to median forecast of 50,000.

Have a great weekend and good luck to England for tonight!!