Market Review - 16/06/2010 21:50 GMT

Euro retreats on worries over Spain

Euro fell on Wednesday as renewed worries on the Spanish banking systems prompted investors to sell the single currency. Poor U.S. housing data also pressured euro but rebound in U.S. stocks provided support to euro.

Although the single currency moved narrowly in Asian session due to market holidays in HK, China and Taiwan, euro managed to climb above Tuesday's high of 1.2350 to a marginal high of 1.2354 in European morning. However, the single currency tumbled from there as traders turned short partly due to the widening of spreads in euro zone peripheral bonds and German bunds. Italy/German 10-yr government yield spread once widened to 142 b.p. from 138 b.p. whilst Spain/German yield spread climbed to a lifetime high of 222 b.p., suggesting market woes on Spanish government debt default increased.

The single currency then fell further after the U.S. housing data in May fell more than expected to the lowest level in five months. However, euro rebounded after the release of higher-than-expected U.S. industrial production while rebound in U.S. stocks also helped price. DJI pared all initial losses and ended the day up by 0.05% at 10409 while FTSE 100 rose by 0.39%, CAC 40 jumped by 0.39% and DAX climbed by 0.26%.

In other news, euro was pressured as a Spanish newspaper reported that the EU, IMF and U.S. treasury drew up an emergency credit line for Spain. However, EC Commission denied the report and both French and German officials said Spain's fiscal problems were not on the agenda of Thursday's one-day EU summit in Brussels on fiscal and economic reform. In addition, Spain's central bank would publish results of stress tests on its lenders in the near future to ease investors' worries over the country's banking sector.

Versus the Japanese yen, the greenback climbed to an intra-day high of 91.82 in European morning as firmness in global stocks boosted risk appetite. However, the pair fell sharply to 91.09 after the release of worse-than-expected U.S. housing data before staging a rebound.

The British pound fell to 1.4752 in European morning but the pair rebounded from there and climbed above Tuesday's high of 1.4838 to 1.4857 in NY morning. However, the pair fell sharply to 1.4725 in NY afternoon on BoE Governor King's comments. King said monetary policy must be set in light of fiscal tightening and financial fragility and when time comes to tighten, rates would be likely to rise first and then followed by asset sales. He also said U.K. economy exhibited none of the traits normally associated with prolonged inflation.

Cable was also pressured by the release of a weak UK consumer confidence report and tough talk by US President Obama who said earlier in televised announcement at the Oval Office 'BP must pay for not only the multi-billion dollar clean-up of the Gulf of Mexico but also the restoration of the region's economy.' U.K. consumer confidence came in at 65 in May versus the forecast of 72.0 and the upwardly revised reading of 75 in April. Earlier, cable was once supported by the better-than-expected claimant count and unemployment rate, which fell by 30.9K vs. forecast of a drop of 20.0K while Apr unemployment fell to 7.9% vs. forecast of 8.0%.

On economic front, U.S. housing starts in May decreased by 10.0% m/m to 593,000 unit rate compared to an increase of 3.9% at 659,000 unit rate in April. U.S. May housing permits also came out less-than-expected at 574,000 unit rate vs 610,000 in April. U.S. industrial production in May came out at 1.2% m/m vs forecast of 0.9% and the previous downwardly revised reading of 0.7%. Eurozone May CPI inflation was unrevised at 1.6% y/y while the core CPI was steady at 0.8% y/y. Eurozone Q1 labor costs quickened to 2.1% y/y. Japan's April all industry activity index rose by 2.1% m/m, less than expected.

Economic data to be released on Thursday include: Swiss SNB rate decision , U.K. Retail sales , U.S. CPI , Current account, Real earnings , Jobless claims, Leading indicators.