Good morning,

Markets are called to open higher this morning. This is what's happening today:

  • Markets are rallying on expectations that central banks in Europe and China will ease monetary policy to spur economic growth. The European Central Bank is forecast by economists to cut interest rates this week to help curb the debt crisis, while a state-owned newspaper in China said the time is ripe for a reduction in banks’ reserve-requirement ratios;
  • 10-year Italian debt is yielding 5.819%, 10-year Spanish debt is yielding 6.329% and 10-year Portuguese debt is yielding 10.120%;
  • Brent is trading at $98.21

European leaders will seek help from the European Central Bank when it meets on July 5. ECB officials will lower their benchmark rate by 25 basis points to a record low 0.75 percent, according to the median forecast in a Bloomberg survey of 57 economists. The bank has a track record of action following political progress, including bond purchases that followed bailout programs and unlimited three-year loans.


Spain’s social security system risks falling deeper into deficit this year, eroding the ability of its 67 billion-euro pension-reserve fund to prop up the Spanish bond market. The reserve account has almost doubled its holdings of Spanish debt since 2008 as declining demand for the country’s bonds led the fund to start replacing German, French and Dutch securities with national debt. As the welfare system posts a loss, the fund’s ability to soak up new issues will diminish, adding to pressure on 10-year Spanish bonds, which yielded 486 basis points more than German bunds yesterday.

The reserve fund’s assets, built up since 2000, is equivalent to about 11% of the central government’s estimated outstanding debt for this year, and more than 75% of the planned bond issuance for 2012. Its waning firepower comes as foreign investors shun Spanish bonds and as domestic banks, which had been picking up the slack, begin to reduce their holdings. Domestic demand in Spain isn’t sustainably sufficient to take all the supply and any slowdown in social security investment would only worsen that.

Spanish bonds have fallen more than 3.5% this year, making them the biggest decliners in Europe after Greece, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The yield on the country’s 10-year bond rose 5 basis points yesterday to 6.38%, down from a euro-era high 7.29% on June 18.


Microsoft Corp. is taking a $6.2 billion writedown for almost the entire amount it paid for Internet-advertising company AQuantive Inc., signaling that its online division will perform worse than the company projected.

The non-cash charge means the company will probably post a loss for the quarter, which ended in June. Before yesterday’s statement, analysts had predicted that Microsoft would report profit of $5.3 billion in the period, data compiled by Bloomberg show.

Stock to watch: Startbucks (Price $52.81, Price Target $64)

SBUX makes most of its money today through its retail store base (~85%). However, the company believes it can leverage the Starbucks brand into a much higher market share of "at home" coffee consumption (both domestically and abroad). Recent developments, such as exiting the Kraft relationship and the Green Mountain/Keurig deal, should result in a "step function" increase in growth in the high-return CPG business in coming quarters, which should support multiple expansion. We also see room for attractive growth in the core retail business, as the US system benefits from throughput initiatives, a macro recovery, and incremental pricing while the EMEA segment works to close the margin gap with the US and China Asia/Pac. International unit growth should also step up in coming years particularly in China Asia/Pac. These key investment themes are further bolstered by a compelling cash flow story, most of which we expect to go toward growing the dividend and buying back shares. Buy.

For further information on SBUX or other stocks and bond we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli