The EU summit held at the end of last week exceeded expectations, and produced a rally in the metal markets.
The meeting resulted in an agreement to allow the European Stability Mechanism (ESM) - the permanent institution to manage the rescue finance programme, which is to take over from the existing temporary European Financial Stability Facility - to buy national government bonds directly, and to inject money directly into banks. There was also relief in the markets that there was no talk of preferential status for the ESM, which would mean the ESM getting paid before ‘ordinary’ investors.
52.9 - purchasing managers’ index in Chicago for June, above expectations
The ESM’s new rights will help to keep government bond yields down by introducing a buyer, and will also help to hold down government debt. Although direct aid to banks was not allowed, governments had to take on additional debt to stop their countries’ banks failing.
Another important commitment made in Brussels last week was a move towards setting up a single superviser for eurozone banks. This could lead to the European Central Bank - the probable superviser - being able to inject funds into troubled banks, further reducing government debt burden. It could also be seen as a step towards a eurozone-wide banking union.
But some things are still too sensitive. The ‘euro bond’, a scheme by which all eurozone governments share responsibility for debt, was not really discussed at all.
Some traders are still looking for more quantitative easing in the US. The recent purchasing managers’ index for the Chicago area (insofar as it is representative of the wider US economy) made the prospect of more money being injected a little more remote as it came in at 52.9 in June, up from 52.7 in May and above expectations of 52.3.
Earlier, US durable goods orders for May rose by 1.1% month-on-month, a much better performance than the previous month’s 0.2% dip and above expectations of a 0.4% rise. Initial jobless claims in the week ending 23 June fell to 386,000 from 392,000 a week earlier, but was not quite as much as expected.
Japanese industrial production dropped by 3.1% year-on-year in May, according to official data, exceeding expectations of a 2.8% drop. This was the steepest fall since the earthquake and tsunami in March last year.