Good morning,

Markets are called higher this morning, This is what's happening today:

  • US stocks were buoyed yesterday after jobless claims and inflation data supported the case for more stimulus by the Federal Reserve, which meets for two days from June 19;
  • Data today may show U.S. industrial production slowed and consumer confidence fell;
  • Greek elections on June 17 may determine if the country upholds austerity conditions attached to international aid, and could lead to the first ouster from the euro bloc;
  • The People’s Bank of China raised its daily yuan fixing by 0.16%, the most since May 2, to 6.3089 per dollar today;
  • 10-year Italian debt is yielding 6.216%, 10-year Spanish debt is yielding 6.754%, 10-year Portguese debt is yielding 10.687%;
  • Crude is trading at $97.88;
  • Malta Government stock prices are out.

This weekend there is the Greek election which will determine Greece's membership in the Eurozone. The direct cost of Greece for the Eurozone is cE360bln which is equivalent to 4% of Eurozone GDP. Though it is not the direct contagion that is most worrying but the indirect contagion which could lead to another 'Lehman' scenario. If Greece exits the Eurozone analysts are predicting that the EURUSD will go to the 1.1 level and that we will see equities lose alot of their value. However, as things stand today there is a greater probability that a pro-Europe party will win the elections. The problem is the polls show a very tight result which could go either way. The truth is that even if a pro-Europe party wins the election, it is expected that no party will win the election by a magority and that additional talks will have to take place before we see a new government in Greece.

The ECB hasn't been doing much to solve the problem. We can forget expecting another LTRO exercise. What's expected is that the ECB increases the ESM from E500bln to E1trn. Analysts are also expecting the ECB to start cutting rates from next month.

So what does Europe need to solve its problems? There are two solutions which are being mentioned:

  • A Banking Union
  • Eurobonds

A Banking Union would result in full regulatory powers passed on to the ECB. This includes the lender of last resort function, the ability to enact bank resolution schemes and the determination of adequate capital quantities. This Banking Union should only be open banks that the ECB has deemed solvent. There are two positives to having a banking union which are:

1) The first part of this deposit guarantee scheme should deal with the fear that the domestic sovereign does not have the ability to support its banking system;

2) The deposit guarantees must be in Euros, as opposed to local currency, to counter the redemption risk.

On the other hand there are Eurobonds which the Germans have been saying no to. According to the Maastricht criteria, the debt/GDP of a country should be at 60%. To get you into the picture, the debt/GDP of Italy is 120% and that of Spain after the E100bln injection is 100%. Eurobonds come into the scenario when a country's debt/GDP exceeds 60%. So any debt issued above the 60% level is controlled by the EU an not individual countries limiting the amount of debt they can issue.

There are alot of ideas in the market but still no conclusions of how to deal with the problems. Yesterday Rajoy, Spain's Prime-minister called for a meeting when the 10-year hit the 7% level. At this level, Spanish debt becomes unsustainable. The 10-year yield closed the session at 6.75% yesterday.

With or without Greece, there are further problems in the Eurozone. Hopefully we will get further action from the ECB, EU leaders and IMF to solve the problems so that Europe can start moving in the right direction.

Malta Government Stocks

Please note that the prices and yields for Malta Government Stocks (June’12 issue) have been set as follows:

  • 3.75% MGS 2017 (IV) at Euro 102.00 – YTM of 3.324% which corresponds to an annualised rate of 3.352%
  • 4.3% MGS 2022 (II) F.I. (June’12) at Euro 100.25 – YTM of 4.268% which corresponds to an annualised rate of 4.314%
  • 5.1% MGS 2029 (I) at Euro 101.00 – YTM of 5.012% which corresponds to an annualised rate of 5.075%

We remain of the view that the most attractively priced MGS is the 5.1% MGS 2029 (I) at E101 (refer to our research report). However, we advise our clients that all bonds, especially those with long duration should be monitored periodically in order to see how the price is reacting to changes in the economy.

Stock to watch: Qualcomm (Price $56.79, Price Target $75)

Our Buy rating of QCOM is based on the fact that Qualcomm continues to be a leader in the WCDMA/HSPA baseband market. The company is now sampling its first HSUPA chipset while its competitors are just sampling their first generation HSDPA products. The company is also far along with its single-chip CDMA and WCDMA phones. We believe these products will be important drivers in bringing down the cost of 2G and 3G handsets.

For further information on Qualcomm or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli