Good morning,

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

  • Credit risk fell as manufacturing indicators in Japan and China beat forecasts;
  • European leaders agreed on measures to ease the debt crisislast Friday;
  • ECB meeting on July 5;
  • Barclays Plc Chairman Marcus Agius plans to resign after the bank was fined a record 290 million pounds ($455 million) for trying to rig interest rates, sparking a political outcry, according to a person briefed on the matter;
  • 10-year Italian debt is yielding 5.819%, 10-year Spanish debt is yielding 6.329% and 10-year Portuguese debt is yielding 10.161%;
  • Brent is trading at $96.35/barrel;
  • US non farm payroll due Friday.

Equities rallied the most this year on June 29 as European leaders reduced aid requirements for Spain and Italy. Stocks rose the most in June since 1999 and more in the first-half than the dollar, bonds and commodities. On Friday, the CAC closed the session 4.75% up, the DAX 4.33% up and Spain's IBEX 5.66% up.

Euro zone leaders agreed to bend their aid rules to shore up banks and bring down the borrowing costs of stricken members like Italy and Spain, in a sign the bloc is adopting a more flexible approach to solving its two-year old debt crisis. The EU leaders agreed to sign the €120bn Compact on Jobs and Growth which includes a capital increase for the EIB and the reallocation of structural funds and project bonds. They also clarified some conditions of short-term financial assistance to be provided by the EFSF/ESM.

ECB to have a central supervisory role for euro area institutions by December. After this procedural step is adopted, the ESM could, following a regular decision, have the possibility to recapitalise banks directly, with appropriate conditionality formalised in a MoU. The Council reaffirmed that financial assistance to Spain for the recapitalisation of its banking sector will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

Herman Van Rompuy has said a new growth package for struggling eurozone countries has been agreed on the first day of the Brussels summit. The EU council president explained the package was made up of elements that would boost the European Investment Bank, help small enterprises and create youth employment. A pilot launch of EU project bonds worth 4.5bn euros for infrastructure improvements, was also announced. Mr Van Rompuy said the agreement was "a sign or our unrelenting commitment" to create growth within Europe.

Stock to watch: Michelin (Price E51.48, Price Target E75)

In 2012, the Price & Mix effect (net of raw material prices) should be the main earnings driver of approx Euro 580m. And next year the volume effect, +5/6% should be the main earnings driver (volumes are today comparable to 2007, the last pre-crisis year, significantly below trend, +4% p.a.). We think tire companies should be favored in current environment since: i) volumes are driven by the more stable replacement markets (approx 75-80% of volumes) even if today they are below trend, ii) the industry is price-disciplined even when volumes are negative (2009, H1 12) and iii) raw materials represent a high 35-40% of sales and are correlated to volumes (they are weak when volumes are low and vice versa), a strong protection on the downside. The volume effect should be the main earnings driver in the coming years, based on a high 38% operational gearing. Buy.

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

Good day and happy trading!

Kristian Camenzuli