Good Morning,

Following a bout of back-to-back negative trading sessions, peripheral assets, led by the Portuguese 10-year government bonds, recovered some losses on speculation that Portugal would contain financial woes at one of its banking groups, Banco Espirito Santo. The bank’s parent company had, earlier on this month, announced that it had failed to make some payments on commercial paper, helping trigger declines in Portuguese debt. Banco Espirito Santo stated that I had an exposure of €1.18 billion to companies of GrupoEspirito Santo through loans, securities and other items. The lender also said it has a capital buffer of 2.1 billion euros above the regulatory minimum following a June capital increase. Peripheral paper started to recover at the end of last week on the back of some more transparency provided with respect to the issues in the Portuguese banking sector – despite this recovery, the market continues to closely monitor any developments in this regard. Meanwhile, German bunds, were little changed after a report showed industrial production in the euro area had declined by 1.1% m-o-m during May.

On a macro scale, recent economic data continue to indicate that global growth is expected to accelerate, albeit marginally, over the next two yeas, while inflation and interest rates should generally remain very low. The US and UK are set for a period of fairly rapid growth whilst the large part of the euro-zone countries show that such recoveries would be insufficient to trigger a surge in inflation, reduction in unemployment and, most importantly in the long-term, the reduction of debt burdens.

The surprisingly sharp fall in US output in the first quarter was primarily a result of the unusually severe winter and does not suggest that a lasting slowdown is underway. On the contrary, the US recovery could well begin to gain traction as the fiscal drag has eased, household debt has fallen to more manageable levels and property prices have recovered. The next step will be for the labour market to respond after which inflationary pressure could begin to surface, much to the delight of the US bulls.

In contrast, the recovery in the euro-zone is pointing towards weak growth, if any, as the growth of industrial production and net exports have slowed, and business surveys have softened. Retail sales and consumer confidence been positive but elevated unemployment levels and the ongoing fiscal squeeze in some countries indicate that a strong recovery is a highly implausible scenario. However, Germany and UK are a different kettle of and are miles ahead of the other EU countries in terms of economic recovery and therefore, continue to provide investment opportunities for what can be termed a bearish outlook for the region overall.

All in all, in the coming week, we expect a slightly firmer tone likely helped by this week’s Yellen testimony before Congress, coupled with generally solid Q2 results, and likely further encouraging US economic data. Meanwhile, US banks, which report this week, are expected to report a challenging Q2 due to sharply lower trading revenues. Watch out for trending changes in asset management, investment banking and loan growth across the major US banks as Q2 earnings releases could also be a key indicator on the health of the US financial sector which is pivotal for the country’s economic recovery.

Have a nice day!