A 2nd day of calm in Europe/China

Spanish and Italian 10 yr bond yields are back below 5%, the French 10 yr yield spread to the German bund is at a 2 1/2 week low, French 5 yr CDS is narrower by 20 bps and at the lowest of the week, the euro basis swap spread is in by 5 bps from yesterday’s widest since Dec ’08 and short selling was officially banned in France, Spain, Italy and Belgium. All of the above are combining for a sense of calm for a 2nd day in Europe (although banning short selling is nonsensical). Imagine that, a sense of calm, enjoy it while it lasts because it probably won’t. French Q2 GDP however was flat q/o/q, below expectations of a .3% rise. Hong Kong’s economy in Q2 fell from Q1 but was still up 5.1% y/o/y and Greece’s economy contracted by 6.9% y/o/y (better though than 8.1% in Q1). Euro Zone IP unexpectedly fell by .7% in June even before everything hit the fan in July/Aug. In China, the yuan rose to another record for a 5th straight day as the PBOC reiterated that they continue to focus on stabilizing prices. It is this tool that will be most effective as RR and interest rate hikes will likely end for now as growth slows. July Chinese bank loans rose at the slowest pace since Dec and M2 growth of 14.7% was the slowest since May ’05.

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