RBA - Rosebank Business Association

Last week was another generally positive week, with economic data, both private and sovereign, mostly better than expected. But the data is patchy, with some US data disappointing amid ongoing concerns over European banks and the ability of some European countries to finance their deficits.

The volatility in May has meant that many investors remain on the sidelines, still scarred after sharp and unpredictable lurches, both up and down in nearly all major markets. The equity markets remain positive though, with the Dow and S&P 500 gaining 2.4% and the Nasdaq adding 3% over the week.
The news this morning that China is to introduce more "flexibility" in setting the rate for the yuan has boosted confidence, as this has been a long running debate ahead of the G20 meeting in Toronto this week. This buys China some time, in that not much has actually changed, with the yuan today unchanged at the daily rate set. But it adds to the general picture of an improving outlook, and should calm nerves this week, even if most Northern Hemisphere traders are either watching football or contemplating prospective holiday venues.

In Europe, the euro zone had a smaller than expected trade surplus, even as exports surged higher. The 16 country area had an external trade surplus of EUR1.8b as exports rose 18%. The sharp rise in exports is likely to point to a rebound in global demand for euro zone goods, with a lower euro and potentially a stronger Chinese yuan only assisting this process in the longer term.

Spanish debt worries seem to have abated for the minute, with sentiment turning more positive. The risk premium that investors demand to hold Spanish debt rather than German benchmark bonds fell to 192 basis points after hitting a euro lifetime high of 238 last week.

Spanish stocks rose 2.2%, lifted by a rally in bank shares. Finally European officials continued their cheerleading efforts, all culminating in a stronger euro over the week.

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