Today, the Eurogroup convenes in Brussels. Discussions on the latest reviews of the Greek and Spanish (bank recapitalization) programmes are on the agenda.
Regarding Greece, there have been worrying headlines last week that the programme is behind on schedule and that the IMF would no longer contribute to the aid tranches because of a new funding gap. However, over the weekend some positive signals hit the screens, indicating that discussions between Greece and the Troika are heading in the right direction and paving the way for the next aid disbursement. Greek FM Stournaras, as well as IMF Tomson and EU Rehn sounded optimistic that an agreement is close. The Eurogroup meeting is expected to end after today’s trading.
Today, the eco calendar is thin with only the German industrial production data. ECB’s Draghi will speak in front of the European Parliament and the Eurogroup meets on Greece (see higher). Germany will tap the market (Bubills) and after closure the US earnings season kicks off with results of Alcoa, which is interesting, but usually no market mover, given its specific profile.
After three consecutive monthly increases, German industrial production is expected to have dropped in May. The consensus is looking for a decline by 0.5% M/M. We believe however that the risks are for a weaker outcome as German factory orders dropped significantly in both April and May, suggesting that production could slow again.
Draghi’s appearances are always worth listening too and that will be no different this time. However, he speaks only days after the July ECB meeting and a remarkable press conference in which he sounded unexpectedly dovish. The only noticeable events since were a bad German orders report for May, due to weak foreign order intake, and the sell-off following a stronger US payrolls report. We think Draghi will be quite happy with the dovish stance they took last Thursday. Weak German orders show the fragility of the economy in Europe, while the sell-off in US Treasuries also threatens the weak European economy via higher yields, which are difficult to digest for a weak euro economy. Luckily, the collateral damage for core German bonds was limited
(due to ECB position?) and peripheral bonds held up very well too. So, we see little reason why Draghi would change last Thursday’s message.
This week’s EMU bond supply is light with scheduled auctions in the Netherlands, Germany, Italy and possibly Belgium.