* EU Leaders Summit to dominate markets
* Expectations of ECB action set to grow
* Italian debt auctions eyed
By Richard Hubbard
LONDON, June 22 Investors are approaching the
coming week's crucial European Union leaders summit braced for
disappointment but keen to put money to work on any signs of a
unified and comprehensive plan to tackle the region's
30-month-long debt crisis.
Wealth managers and analysts say no one really expects the
meeting on June 28 and 29 to produce the definitive solution. A
credible plan supported by all nations with a realistic
implementation time line, however could start to bring investors
"It's very painful for professional investors and retail
investors to hold cash and bonds in this environment when you
look at inflation," said Lorne Baring, managing director of
Swiss asset manager B Capital Wealth Management.
Baring said investors would prefer to be owning strong
international companies that have cash-rich balance sheets and
pay good dividends.
"But they are held back by headlines created by the
inactivity of politicians," he said. "It's just wiping trillions
off the value of equities globally and, frankly, unnecessarily
Analysts at Barclays Bank said investors wanted to see three
things emerge from the summit: a roadmap to fiscal integration,
moves toward better supervision of the region's banking sector,
and measures to revive economic growth.
"I don't think many people really expect a silver bullet to
be delivered. People have realised that there is no easy
solution," Laurent Fransolet, head of European fixed income
research at Barclays Capital, said.
But he said with short-term Italian debt offering yields of
around four percent versus safe haven bonds and similar assets
at close to zero returns, if some progress was made people would
start to think about buying.
"If you really curtail the tail risk then it makes it a
little bit more attractive," he said.
However, he also cautioned: "The nervousness in these
markets and the risk aversion is going to be exceptionally high
even if we get some relief in the near term."
CENTRAL BANK BACKSTOP
Equity investors have been generally resilient to the cycle
of crisis in Europe this year, clinging to a view central banks
will continue to manage the world economy and limit the impact
of Europe's problems on global growth.
World stocks as measured by MSCI's main global equity index
are up 1.2 percent year to date and the widely-
tracked S&P 500 index of U.S. stocks has gained 5.4 percent.
But these gains are mainly due to the assistance already
provided, signs central banks remain ready to act, and forecasts
that growth outside Europe will persist this year due mainly to
activity in emerging markets like China.
Although disappointment that the U.S. Federal Reserve did
not go further to counteract growing signs of a slowdown in its
economy at its most recent meeting dented some of this optimism
in the past week.
Barclays' latest global outlook forecasts the world economy
will grow by 3.5 percent in 2012, in line with most other major
forecasters, and by 3.9 percent in 2013 despite a downward
revision to growth in the United States.
Hopes among some that the European Central Bank could step
in with a rate cut at its next meeting in early July could get a
boost from the release the euro area's harmonised index of
consumer prices (HICP) on June 29.
The inflation reading is expected to be stable in June after
falling to its lowest level in over a year in May at 2.4
percent, due to a big fall in energy and commodity prices.
The index may even fall further given the weakness in energy
prices this month. The price of Brent has fallen by
around 7.5 in the past week and has slid by about 30 percent
from its 2012 high of $128.40 reached in March.
Data on bank lending to the private sector and growth in
the M3 monetary aggregate, both for May, could also fuel
expectations of a rate cut as these have been slowing since the
central bank ended a programme of massive liquidity injections
into the banking system.
The ECB released over 1 trillion euros in cheap three-year
loans (LTROs) to banks in December and February, taking the heat
out of a feared credit crisis in the first quarter of this year.
Many economist now expect a cut in interest rates at the
ECB's next policy meeting on July 5, an option several
policymakers have also mentioned since they were left
unchanged at the June 6 meeting.
Europe's peripheral bond markets will be focused on Italy's
sale of zero-coupon and inflation-linked bonds on Tuesday and
medium- and longer-term bonds on Thursday. Spain is also due to
sell three-and six-month Treasury bills on Tuesday.
Both Spain and Italy are finding it increasingly hard to
finance themselves in bond markets and still have a lot of money
to raise to meet their funding requirements.
Italy's 10-year government bond yields are
currently around at 5.80 percent with equivalent Spanish debt
at 6.55 percent.
Their Treasuries will both be hoping that European leaders
do enough at the upcoming Summit to encourage buyers.