This morning, the markets have bounced back from earlier lows of fears of the Euro debt crisis have exploded as the market has turned its eyes toward Italy, the EU’s third largest economy. Yields on bonds in both Italy and Spain have risen dramatically, and while though not quite at Greek or Portuguese levels, this is a serious development.
Right now there is tug-of-war taking place between the perceived risk taking place in the EU, and the markets here in the US. Stock earnings season has started this morning and looks to be positive, but the debt-ceiling debate that is raging here has taken on a new life of its own and has become so politicized that the market is starting to believe that there is a possibility of a US default, which was otherwise unthinkable.
For the time being, this means that the fundamental data will take a back seat to the risk themes in the market and the overall global macro picture. The European debt crisis is the most important piece to the puzzle, followed by the US debt ceiling, followed by the Chinese growth story. Chinese GDP figures are due out tomorrow and if they have slowed significantly—watch out!
So there is major risk in the marketplace today, even though the markets have bounced significantly higher off of the lows. A rumor that the ECB was actively intervening in the purchase of Italian and Spanish bonds may have been the catalyst.
In the forex market:
Aussie (AUD): The Aussie is mostly lower in this risk-off environment in what is a light week of news for Australia directly. However, the Aussie will be greatly affected by the Chinese data as they are the largest recipients of Australian exports.
Kiwi (NZD): The Kiwi is lower across the board on risk aversion and tomorrow’s missing GDP figures from last week will be released.
Loonie (CAD): The Loonie is also lower as oil prices have pulled back and general risk aversion is driving markets lower. There is relatively little news out of Canada this week.
Euro (EUR): Volatility reigns supreme with the Euro today as it has bounced off of earlier lows and is trading around 1.40 vs. USD. EU ministers will be convening all week to try to get a handle on the contagion which now threatens Italy’s debt. While rates are not nearly at Greek levels, it is alarming how quickly things can change and how EU ministers will have to act as the market is forcing their hand. Basically, their time is up. (Click chart to enlarge)
Pound (GBP): The Pound is also mostly lower as CPI data showed that inflation came in lower than expected at 4.2%, down from 4.5% but still nearly double the BOE target rate. With economy contracting and prices pulling back, the BOE appears to be on hold for a while.
Swissie (CHF): The Swiss franc is the “beneficiary” of safe-haven money flows and earlier today it made an all-time high against the Euro. Expect the Swissie to trade on risk themes all week.
Dollar (USD): The Dollar is giving back earlier gains as risk aversion has lessened as the US session has begun. Trade balance figures showed a deficit near all-time highs and the release later today of the Fed minutes is not likely to inspire confidence. Advance retail sales figures are due out later this week and are also likely to show weakness.
Yen (JPY): The Yen is higher across the board on risk aversion and the BOJ rate policy meeting where they left everything unchanged but raised their economic assessment of the economy. Apparently the recovery from the natural disasters has been strong and swift, so additional accommodative measures were deemed unnecessary. (Click chart to enlarge)
Obviously the major risk in the marketplace is coming from the Euro zone and until there is some sort of solution put forth, the markets will be on edge for some time. This comes in addition to slowing global growth prospects and inflationary pressure that is being felt around the globe.
The politics of the economics in the Euro zone should serve as an example to the US of what can happen when you politicize economic problems. The EU had ample time to figure out a solution to the debt problems but chose to kick the can down the road and hope they disappeared on their own. This obviously didn’t happen and in fact on served to exacerbate the problem, putting them in an unenviable position and dealing from a position of weakness.
So what are we doing here in the US? The exact same thing. Politicizing economic problems, kicking the can down the road, creating a lack of confidence that add to our problems and not help solve them are all examples of how we have gone astray.
It is quite possible that the world is in for a rude wake-up call very soon, and it could come in the form of any number of issues. The confluence of them all occurring at or near the same time could be catastrophic, so proceed cautiously.
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