EU Summit, Not about Fiscal Union, but Banking Union

We expect little news from the EU conference, Mr Cameron is expected to endorse further integration of the 17 Euro zone nations with the caveat that it cannot impede the 27 nation single market. In the German lower house of parliament  Merkel spoke today proposing “a new element of solidarity” for troubled EU countries, funded by a financial transaction tax, it would be limited in time and help consolidate struggling countries budgets and pay for investment in their respective countries. A Franco led charge to speed up the introduction of a European bank supervisor has as expected hit a German wall, with Berlin worrying over the potential costs.

Interestingly Hollande’s interview today in 6 European newspapers shows that the Merkozy alliance is definitely a thing of the past and there will be increased tension between Merkel and Hollande in the coming months. France sold a total of €8bn of debt today with it tapping the July 2017 for just under €5bn at an average yield of 0.92%, down from 0.98% a month ago. He said, ““The subject of the summit isn’t fiscal union but banking union….The only decision we have to take, to confirm in fact, is the putting into place of a banking union by the end of the year, notably the first step, which is the banking supervision.”

UK retail sales exceeded expectations with Sales ex auto fuel +0.6% MoM (expected 0.3, previous revised up to -0.2%), YoY printed +2.9 (expected 2.4%, previous revised down to +2.9%), these numbers come on top of the good news we saw from the jobs numbers.

For the second time this month S&P and Moody’s have clashed over the rating of commercial mortgage backed securitisation deal. Moody’s today it said a European commercial bond which was awarded a top credit rating by S&P (Aaa) wouldn’t have received a top rating from them, due to the quality of the properties and complexity of the underlying loans. S&P retorted, “We believe our ratings reflect the creditworthiness of the securities in the transaction.” The deal allegedly took £1.4bn of UK property loans off RBS’s balance sheet.

Assuming nothing alarming comes from the conference the market will trade Spanish news until the last regional election, which is scheduled to be Catalonia’s in Mid-November, most in the market expects this is the final piece in the jigsaw and then Spain will request the bailout. We are getting to significant technical levels in both FI and FX and would monitor these closely for breaks or retracements. For now we are comfortable in staying short with a steepening bias.