Good morning,

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

  • HSBC Holdings Plc cut its outlook for China’s economy;
  • South Korean consumer confidence dropped;
  • German Chancellor Angela Merkel hardened her resistance to euro-area debt sharing before European leaders meet this week;
  • Italy is scheduled to sell inflation-linked securities maturing in 2016 and 2026 today as well as E3b of zero-coupon bonds. Italy’s 10-year yield rose 21 basis points to 6.01% yesterday;
  • Spain’s 10-year yield increased 26 basis points to 6.64% Spain will offer three- and six-month bills;
  • Moody’s Investors Service downgraded 28 Spanish banks, citing the country’s sovereign debt and rising losses on real estate loans, before Spain and Italy sell debt today;
  • 10-year Italian debt is yielding 6.01%, 10-year Spanish debt is yielding 6.637% and 10-year Portuguese debt is yielding 9.678%;
  • Brent is trading at $90.85;
  • EU Leaders summit on 28/29 June.

The sell-off we saw in the markets yesterday was caused by investors expecting another unconclusive summit from the EU leaders. On June 28/29, the EU leaders of all 27 EU countries will hold a Council meeting in Brussels. The markets expect that leaders will agree on a “pact for growth” which aims to complement the “fiscal compact”. The market further expects an agreement of the European leaders to go ahead in forming a “banking union”, but do not expect details in that respect. While probably providing a commitment for further fiscal and political integration, the market does not expect that the Council will provide a roadmap for that journey yet.

While there is broad agreement among the euro area leaders that further fiscal and monetary integration is warranted, there are substantial differences regarding the speed and the procedure for more integration. As Angela Merkel repeatedly said, Germany favours a gradual approach under which fiscal and political integration with the transfer of sovereignty from national governments to EU institutions takes place first, before going ahead with measures to mutualise debt. In contrast, France wants to have a swift increase in common funding tools but has huge problems in giving up sovereignty to EU institutions.

Moody's downgrades 28 Spanish Banks

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s largest lenders, were downgraded by Moody’s Investors Service because of the country’s sovereign debt and souring real-estate loans. At least a dozen lenders were lowered to junk status, Moody’s said yesterday in a statement. The ratings company downgraded six banks by four levels and 10 by three grades with the rest getting one- and two-tier declines.

In Spain you have a combination of a significant sovereign-debt burden coupled with a collapsing real estate market. That’s doubling the pressure on Spanish banks. Moody’s issued a three-step reduction in Spain’s credit grade on June 13, citing the debt, a weakening economy and limited access to capital markets. Spain was lowered to Baa3, the lowest investment-grade rating, from A3 and remains on review for a further cut after announcing plans to borrow E100b from European Union rescue funds to recapitalize banks. The lenders are facing the “reduced creditworthiness” of the nation as well as the “expectation that exposures to commercial real estate (CRE) will likely cause higher losses, which might increase the likelihood that these banks will require external support,” the ratings firm said in its statement.

Stock to watch: Intel (Price $26.04, Price Target $33)

We believe Intel is well positioned to benefit from a solid PC demand and competitive concerns are overdone. We expect price competition to subside now that Intel has cost and technology leadership. A combination of industry and company-specific factors should permith Intel to generate record EPS and operating cash flow through 2013. Combined with an above-average dividend yield, we rate Intel a Buy.

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Good day and happy trading!

Kristian Camenzuli