FOREX TRADING

Over the past week, global market sentiment has soured again. Equities have moved lower and volatility a bit higher, but still remain on better levels than a month ago. Conditions in US credit and money markets appear relatively stable, but there are signs of intensifying stress in PIIGS sovereign, covered bond markets.

The expiry of the ECB 12-month LTRO on Thursday is creating jitters in the European money markets, where conditions have worsened despite a tightening of the EONIA EURIBOR spread. The 3M EONIA has risen to the highest level since July 2009, as markets are worrying that weak European banks may have difficulties rolling over short-term funding, although the ECB has announced that it will continue to provide liquidity at 1% full allotment in a three-month LTRO.

ECB’s purchases of PIIGS government bonds remain very limited and the market is increasingly questioning the central bank’s commitment to support PIIGS.

Greece has announced it will return to the markets in mid-July by issuing T-bills.

In a statement from the G20 meeting weekend, the big countries announced that they will halve budget deficits by 2013 and aim to begin to bring debt ratios lower three years later. However, much of this was already embedded in the existing budgets and disagreement between the US and Germany about fiscal policies dominated the meeting. Furthermore, the countries did not come any closer to reaching an agreement about financial regulation or trade issues. Generally, the news out of the meeting suggests that co-ordination among the big countries has become more difficult.

In the US, the Senate and the House committees have reached an agreement about the content in the financial regulation bill. The final language of the bill was less harsh than initially feared. That said, upcoming regulation will come at some cost for the financial industry. The Senate and the House are expected to vote on the final proposal this week. However, renewed uncertainty has arisen following the death of Senator Robert Byrd, which may threaten to delay the Senate vote.

Watch list for the coming days

Regulation of the financial system remains at the forefront of things. The questions surrounding CDS bans remain unanswered

Will ECB intervention soon ramp up PIIGS purchases

Upcoming PIIGS auctions – Spain sells up to EUR3.5bn bonds (1 July)

Possible downgrades by rating agencies and focus on banking sector problems

Deadline for applying for recapitalisation via the Fund for Orderly Bank Restructuring (FROB) in Spain on 30 June

One-year long-term refinancing operation (LTRO) matures on 1 July

European bank stress tests to be released mid-July