Euro Regains $1.42 on Looming Mini-Bailout & Phillly Fed Contraction

Stocks made small gains but the pattern of forex trading was risk averse as the low yields led and commodity currencies (along with GBP) lagged. US Philly Fed survey fell below zero. The situation in Greece calmed to a simmer from a boil after PM Papandreou appeared to squash an uprising within his Socialist party as he forced two Parliamentarians to resign.

PM Papandreou also pledged to continue to lead his party. EU leaders ensured Greece will remain funded until September. The euro made slight gains against USD after falling more than 2.5 cents yesterday.

US economic data continues to point to high unemployment and a slowdown in manufacturing. The 'H2 Rebound' is starting to look like it could morph into a year of staggering at 1-2% growth. Nothing yet points to a double dip. The Philly Fed fell to -7.7 compared to the +7 consensus. As Ashraf mentioned via Twitter, this creates a distinct risk of a sub-50 ISM manufacturing reading. Initial jobless claims were better than expected at 414K vs the 420K consensus but remain above 400K for the 10th consecutive week.

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Another story that weighed on market sentiment was a report that Basel banking rules may force large lenders to hold an addition 3.5 pp capital buffer. The proposal suggests a sliding buffer scale based on bank size and systemic importance. In theory, this is a great way to improve financial stability without forcing banks to break up. It will also foster a more diversified financial system by giving smaller lenders a leg up. Although the knee-jerk reaction has been negative we expect a change of heart from the market. There was no doubt that something was going to be done internationally on 'too big to fail' so some measure of this had to be priced in. There was even talk from the Fed's Tarullo of a 7 pp buffer. At the same time, this does nothing to necessarily drive up the costs of businesses dealing with banks as they should have low-cost opportunities with smaller lenders and that will force larger lenders into greater competition.