Ahead of the open, (29-06)

Any doubt if the previous day’s morning rally was artificial was answered by the Dow ~170+, SP’s 18 handle drop at its trough.  Any question if it’s a fast traders market was answered by the Dow ~150/ SP+ 15 recovery surge in the last hours off a ‘cancelled Merkel conference’ headline leading to the possibility of a EU deal at hand.   The fact it’s a ‘renters’ ES/ETF market was also evident as single stocks hardly participated in the rally with most coming little off their lows with many ‘growth’ names still off 2-5%..KORS ,FFIV, VMW  just some names at the high end. (MA,  PCLN off 10pts and even AAPL -5pts).  Hardly what you’d call an inspiring tape for the longer than an hour or day.

 

 

...but wait...

  

A deal has really been struck tonight and the euphoria has pushed ES over 1340.  The question on many minds tomorrow will be how long before this shine wears off and we have another anti-climactic moment as we did following Spain’s bailout and Greece’s elections??. Those fading the upside tomorrow on that notion may be in for a surprise.  We discussed only needing a credible deal and at this juncture it seems to be, which should allow the market to end decent on the week, month and Q.   It will be interesting to see how long the short covering lasts and if 'longs' emerge afterwards.  '24-48hr renters' need to go, investors need to show signs of life.. In all, the fact we finally got a surprise out of a EU summit is a positive and it would be a disappointment (and surprise here) if market doesn't end the Q on a good note.

  

The immediate summit need of reducing Spain’s borrowing costs/ sov’ balance sheet woes due to banks debts was ratified with Germany caving in on bond buying.  Italy also gets a lighter set of conditions to reduce its borrowing costs.  Question here is ‘show me the money’ as there is over ~2 trillion of debt in Spain’s /Italy’s sheets and about a ~1/4 of that is in the ESM/EFSF funds.  Overall, this the big surprise with a gift for Ireland who take home a ‘surprise’ cake as well.  Breaking up the sov’/ bank link seems to be broken.  Also, a proposal of direct control covering all banks by a European ‘banking supervision system’ seems to be on track to recap the banks if need be. Still the details need to be seen and analyzed.  This is the first step to the ‘banking union’ expectation discussed here in the past leading up to the summit.

 

All in, a humbling 24hrs for Germany and a celebration for Italy and Spain.  Germany backed into a corner politically by Italy/Spain not signing off on the (small)120bln growth pact until borrowing costs issues addressed and for its football team on the pitch with Italy and Spain up for the Euro cup now this weekend.  As for the markets, it’s time to look at ahead to the ECB on July 5^th and earnings season around the corner.  Yep, that’s how the market works..on to the next!.  Expectation now will rise for ECB rate cuts and some LTRO as ECB should be pleased with the summit results to go ahead with easing measures.  Also, earnings expectations are depressed, thus any surprises (better than feared) and/or signs it’s not that bad should also be a market positive to go with possible ECB actions.