The health of global manufacturing remained a key point of contention for markets overnight with PMI releases from both Europe and the United States signaling diminished demand. The latest round of PMI data from Markit Economics showed German manufacturing contracted at the fastest pace in 3-years. German PMI fell to an index level of 45 in June from a previous 45.2, slightly higher than the previously estimated 44.7. Unsurprisingly Euro-Zone Manufacturing PMI also remained firmly in contraction territory, while the latest official unemployment data showed a new Euro-era high of 11.1 percent in May from a previous 11 percent. Across the Atlantic, the closely watched ISM manufacturing index undershot estimates with the gauge retreating to 49.7 from a previous 53.5. Economists expected a moderate decline to 52. A separate report from Markit Economics showed manufacturing PMI slipped lower to 52.5 in June against the preliminary read of 52.9.

U.S stocks failed to maintain the positive lead set by European markets, with the DOW finishing slightly lower while the S&P500 managed to squeeze out minor gains by the close. The slow-down in U.S manufacturing is supportive of the view the Federal Reserve will need to embark on further easing measures which appeared to have kept markets from deeper losses. On balance, we’ve seen some encouraging moves across the risk spectrum but the euphoria displayed after the EU summit has now subsided with market participants back to the reality of interpreting the latest economic data points.

After peaking at highs just shy of US$1.27-figure in the wake of the EU Summit, the Euro has maintained a controlled decline with the pair displaying supportive behavior around overnight lows of US$1.2567. Meanwhile, the shared currency continues to be outpaced by its risk counterparts with the Aussie, Kiwi, CAD and Sterling leading the charge higher. The Australian dollar remained supported with price action moving to 2-month highs of 102.78 US cents.

Locally, the focus will now turn to the RBA policy meeting with the outcome released at 1430 AEST. The release of June’s policy meeting minutes showed Stevens and Co remain cautious given the negative shock-waves resonating from abroad, in particular Europe. Nevertheless, after a 50bps cut to the official cash rate in May, the minutes showed the board’s decision to slice a further 25bps was “finely balanced” given little in the way of new information suggesting significant weakening locally, while also taking into account the need assess previous policy adjustments. This suggests the RBA will hold a steady course this Tuesday as they understand the effects of previous easing, in addition to tentative signs of stability from the Euro region.

It was an exciting day across global markets on Friday as investors applauded the EU’s latest effort to contain Europe’s economic crisis. To break the negative feedback loop between banks and European nations, EU leaders have agreed to allow struggling banks to recapitalize using the regions rescue funds the European Financial Stability Fund and the European Stability Mechanism. Leaders also agreed to allow the rescue fund to buy distressed government debt in an effort to reduce borrowing costs of nations such as Spain who remain at a high risk of being shut out of debt markets. Although it may be unwise at this early stage to regard this as a watershed moment in Europe’s plight to regain economic composure, it represents a significant milestone for countries such as Spain who earlier last week formally requested financial aid in order to recapitalize their struggling banking system. In essence, this latest effort promotes segregation between the banking sector and governments who would generally suffer the negative repercussions through higher borrowing costs. This ‘grand bargain’ may also be seen as a point in favor of the pro-growth agenda of France, Spain and Italy who have consistently been met with German resistance over the implementation of such measures.

Markets responded to the news in kind with a notable leg higher seen through the latter half of domestic trade on Friday and continued to gain momentum through European trade with the DAX and CAC finishing a remarkable 4.33 and 4.75 percent higher. Likewise U.S markets recorded solid gains with the DOW and S&P rising 2.2 and 2.5 percent respectively. Judging by market response investors are clearly inspired by the latest European effort, however it remains to be seen if this represents the key inflection point we’ve been waiting for or simply a short-term sugar-high before the negativity sets in once again.  Nevertheless, we’ve seen significant improvement from southern European debt markets with Spanish 10yr bond yields dropping below the 6.5 percent mark – an encouraging factor considering earlier in the week yields touched euro-era highs above the 7 percent region.

The Week ahead will see a number of critical data points to guide sentiment with Friday’s U.S non-farm payrolls the headline event on Friday. The U.S economy is expected to have created 90,000 jobs in June from a previous 69,000, with the official unemployment rate to remain unchanged at 8.2 percent. A slew of jobs-related precursors may sway market expectations in the lead up with ADP employment change, Challenger job cuts and weekly jobless claims due for release ahead of Friday’s non-farm payrolls.

Earlier in the week, interest rate decisions from Australia, Europe and the United Kingdom will be a primary focus amid the usual headline risk from the Euro-region. Following on from Friday, we’ve seen risk currencies open slightly higher with the Aussie breaking Friday’s high against the greenback and the Euro maintain it’s north bound trajectory, albeit in extremely illiquid conditions.

The bears maintained control across currencies overnight with further downside from risk assets promoting upside for the in-form greenback. Equity markets from both sides of the Atlantic struggled to gain traction with investors remaining transfixed on the European Council meeting in Brussels.

There’s a general lack of enthusiasm surrounding the EU Summit which is expected to provide the “building blocks” for a deeper Euro region integration. Its clear solidarity among leaders and tentative long-term initiatives will not be a crowed pleaser as debt ridden nations such as Spain continue to be driven closer to the edge.

Earlier this week, leaders from Germany, France, Italy and Spain announced a new pro-growth alliance with an estimated €130 billion (representing around 1 percent of GDP) to be set aside to focus on boosting growth and employment. While it may be a worthy exercise to channel funds into investment initiatives, investors remain unconvinced this ‘growth pact’ will be enough to kick-start the economy. Leaders are also light on the detail with questions surrounding the origin of the funding, whether it is ‘recycled’ money already assigned for stimulus programs or newly raised capital.

Economic news overnight saw Gross Domestic Product in the United States rose at an annual rate of 1.9 percent in the first quarter matching expectations but significantly lower than 2011 fourth quarter growth of 3.0 percent. Personal consumption expenditure data showed growth of 2.5 percent in the first quarter slightly lower than the expected 2.7 percent while core expenditure data showed 2.3 percent growth against expectations of 2.1 percent.

Earlier this morning the Australian dollar made a brief break to the downside of US dollar parity, but buying activity around the figure won out with momentum carrying the local unit to current levels of 100.4 US cents.  The Euro maintained a controlled declined setting a fresh monthly low of $US1.2406 and remains under moderate pressure around current levels of $US1.2440. Economic data today includes local private sector credit and Chinese Industrial profits, both scheduled for release at 11.30am.

Currencies  failed to reflect any decisive direction overnight, with solid gains across European and U.S equity markets failing to translate to any direct upside for the Euro and a mixed performance across the commodity bloc. European stocks showed a sense of optimism ahead of the summit overnight with the DAX and CAD finishing 1.5 and 1.67 higher, but the Euro told a decidedly different story with price action capped below $US1.25-figure. Downside pressure on the Euro was maintained throughout the session with the $US1.2440 region once again providing support. A lower than expected CPI print in Germany has also provided further weight to the argument the ECB will ease monetary policy at next week’s meeting. Southern European debt markets also maintained a less than inspiring outlook with Spanish bond yields edging closer to the 7 percent region, despite a solid day across equity markets.

The anticipation ahead of this week’s European Council meeting maybe high, but it’s clear the bar has been set low with the broad market consensus suggesting we’re unlikely to see anything groundbreaking to induce a meaningful near-term rebound across the risk spectrum. With German Chancellor Angela Merkel remaining steadfastly opposed to jointly issue debt in the form of Eurobonds, investors are hoping Germany will at least ease their resistance to other initiatives such as allowing the EFSF/ESM rescue funds to buy distressed government debt.

Across the Atlantic, U.S markets found solace in stronger than expected home sales data with the positive lead from European equities also providing a solid platform for gains. New home sales rose at a yearly pace of 15.3 percent beating analysts’ estimates of a 10 percent rise. Durable goods orders rebounded more than anticipated in May rising 1.1 percent against expectations of a 0.5 percent rise.

The Australian dollar traded in a tight 35 pip range overnight with price action unable to break through previous resistance around the 100.85/9 US cent levels. Still the Aussie recorded modest gains against its major counterparts with strength against Sterling and Japanese Yen leading the charge higher. Conjecture over the possibility of near-term policy easing from China has also provided a mild upside bias for the Aussie dollar. Mid-tier data on the local docket today includes the HIA New homes sales data.

Despite general support across high yielding currencies, the Euro remained out of favor overnight with the assistance of ratings agency Eagan Jones which downgraded Germany from AA- to A+. Investors are also transfixed on the EU Summit at the end of the week and the Euro’s reluctance to grind higher suggests expectations are low. Should markets keep the status quo ahead of the event, it may present upside value for the Euro if European leaders – at the very least – produce any solid growth initiatives. For now we’ve seen a divergence from the Euro against its risk counterparts with the EURAUD pair maintaining a downward trajectory. Support for the Euro kicked in around the $US1.2440 level but remained under pressure below $US1.25-figure.

The cost of Spanish government debt remained a negative focus across markets with an auction of 3-month bills demanding a yield of 2.362 percent, a considerable difference to 0.846 percent last month. It’s evident the ability for Spain to raise cash in the traditional form is becoming unsustainable with the nation essentially being shut out of the debt markets. Although Spain has formerly sought financial assistance to recapitalize its stressed banking system, the risk of a sovereign bailout is growing by the day, placing European leaders under further pressure to come up with a palatable blueprint at this week’s summit.

After sliding on Tuesday, U.S stocks staged a modest comeback overnight but the general lack of optimism surrounding the EU summit later this week kept gains in check. The DOW and S&P closed 0.26 and 0.48 percent higher respectively.

Economic data from the U.S showed the S&P/Case Shiller Housing Index rose modestly in April while U.S consumer confidence fell to an index level of 62 in June against an expected print of 63.

Support was maintained for the Aussie dollar which stabalised above US dollar parity rising to highs of 100.85 US cents with parity acting as short-term support. With no local event risk scheduled for today, we expect the local unit to adhere to these technical levels throughout the domestic trade. At the time of writing the Australian dollar is buying 100.6 US cents.