It’s another typical European session, much noise, some volatility and a one directional move that tends to squeeze out the weaker shorts. Euro political and fundamental dynamics remain the same. So, what has changed? Absolutely nothing, investors and dealers have the same fears and mostly the same positions as they wait for more concrete Euro fiscal direction.
In this morning’s session, Euro equities have shrugged off their initial weakness, dragged higher by falling Italian bond yields after the ECB was a buyer of Italian, Spanish and Portuguese bonds in the secondary market. This should bode well for tomorrows Spanish 10-year auction. How can we describe all this? It’s just another relief rally following a day of carnage. Ideally, investors could be looking at it as an opportunity to again short the market at better levels.
Currently, it’s all about a spreads game. With the widening of spreads starting to affect the “core European countries”, it will only be a matter of time before investors start questioning at what stage Germany will start losing its safe haven status. If the market reaches a point where Italy and Spain are no longer able to fund themselves directly and French bonds are becoming stressed, the market will be asking itself, what effect will it have on Germany? We are not there yet, but, the market dynamics are pushing us to ask those questions with the political situations in both Italy and Greece being closely monitored. Today, Monti has to drive through his austerity plans while Greece has to over come a confidence vote.
Some analysts see the dollar index (77.89) testing 80 sometime soon or even higher, as the flight of capital out of riskier assets pushes the “historical reserve currency” higher. Improving US data of late certainly helps, however, overseas fundamentals continue to play “second fiddle” to the Euro-zones troubles. This is the same message from the BoJ. Governor Shirakawa kept his key interest rates and asset-buying fund unchanged earlier this morning. He cites their biggest risk is the ‘Europe’s sovereign debt problem’, after he downgraded his assessment of the Japanese economy. He is concerned that “European problems could result in weaker growth not only in the region but also in the global economy through its effects on financial markets”. Obviously, it continues to affect their economy directly with safe haven trading strategies coveting the yen.
Again, this morning there is little data to chew on, markets will have to rely on reacting to any toxic or pro-Euro headline news.
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US yields dragging their feet