Here We Go Again!
The Euro debt crisis is back in focus to start the week as Greece is trying to figure what to do about its seemingly insurmountable debt. The market has already priced in some degree of default, though questions remain as to whether certain types of restructuring would constitute default.
Meanwhile, Italy had their debt rating cut by S&P as the fear of contagion is starting to spread. Elections in Spain gave the incumbent Socialist Party its largest defeat, as general unhappiness over the economic malaise is overwhelming.
PMI data from the Euro zone came in lower than expected, re-enforcing the negative economic picture. Chinese PMI data came in overnight as well, and it was less than expected. So we are looking at a situation of slowing global growth combined with contagion from the Euro zone debt crisis that is a toxic mix for economic health.
Facing the end of QE2 is not helping either, and GDP figures due out later this week from the EU, UK, and US may confirm the weakening sentiment.
So today is a classic risk-aversion day, with Dollar and Yen higher, the rest weaker. Stocks and commodities are lower as well, though gold is holding fairly steady as it is seen as a safe haven.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion as its high correlation to the MSCI Pac Rim Index is reflective of lack of risk taking. There’s not a lot of news for the Aussie this week so expect it to continue to trade on risk themes.
Kiwi (NZD): The Kiwi is lower for the same reasons as the Aussie, and tomorrow the RBNZ will release its 2-year inflation expectations report,
Loonie (CAD): The Loonie is mixed this morning as it is weaker due to risk aversion but stronger due to Canada’s close economic ties to the US. The market sees the risk as coming from the Euro zone and China slowing down, so the Loonie benefits.
Euro (EUR): The Euro is lower across the board as the debt crisis is starting to return to center-stage. We are now starting to see the politics mix with the economics as incumbents are in danger of losing power across the EU. EUR/USD is below 1.40. (Click chart to enlarge)
Pound (GBP): The Pound is faring better than the Euro this morning after the BOE Chief Economist came out and said that the Central bank should raise interest rates even if economic recovery remains uncertain. Wednesday’s GDP release will show how the UK economy is faring. (Click chart to enlarge)
Dollar (USD): The Dollar is stronger across the board as risk aversion has increased the demand for the safe-haven status of the Dollar. Thursday is the release of GDP figures.
Yen (JPY): The Yen is mostly stronger ass carry trades are unwound and the safe haven of the Yen is sought out. With China looking like it is going to slow down, Asian stocks were down greatly overnight. Thursday is the release of CPI data and retail trade figures.
Well it was only a matter of time before the focus returned to the Euro zone and the debt crisis. EU leaders have had ample time to try to workout a solution, yet have done very little in the way of progress.
Perhaps this will be a situation where declines in the Euro will be offset by the hope of a solution, though contagion throughout the Euro zone will be the major issue. As unpopular as the bailouts are, leaders must figure out a way to stop the bleeding even if that means political suicide.
Until that time comes, expect there to be major risk in the marketplace and the combination of the end of QE2 could send the global economy spiraling lower.
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