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Yet another bad hair day for risk assets yesterday amidst continuing concerns over a myriad of issues, including the unstable political situation in Greece and ongoing question marks around whether it will remain in the eurozone, the dire state of Spanish banking and sovereign finances, and a sense that the losses registered by the CIO unit at JPMorgan could turn out to be much greater than already disclosed.

Also contributing to the uncertain mood was Moody’s announcement that it was downgrading 26 Italian banks and worries over whether Greece will pay the holders of a EUR 436m floating rate note which matures today. Gold, a traditional safe-haven in times of distress, has lost its lustre, falling to its lowest level for the year at USD 1.550 an ounce (more on gold below).

Guest post by Forex Broker FxPro

Instead, it is the greenback that is the preferred destination of those fleeing risk, with the dollar index already up by 2% so far this month. For the dollar bulls, should we see a sustained break of the mid-January high of 81.50 (in the dollar index) then this would provide further encouragement. Indeed, it could justifiably be argued that, against the backdrop of dreadful financial and economic conditions in large parts of Europe, and with China in the midst of a very bumpy landing, the dollar really ought to be performing better than it has done.

Another currency that continues to attract buying interest is the pound, with cable steadfast at around the 1.61 level and EUR/GBP now comfortably under 0.80. The single currency fell to 1.2815 overnight, but it has been a remarkably measured sell-off rather than blind panic. Even for the Aussie, which has been under sustained fire all month, the decline through parity was not one of capitulation, notwithstanding the evident determination over recent weeks of traders to eliminate their long positions.


More vengeance from Europe’s bond vigilantes. Europe’s bond vigilantes wreaked further havoc in bond markets yesterday, with the weak and vulnerable sovereigns being castigated mercilessly at the expense of the fiscally responsible. In general terms, it is the bond markets of those electorates rebelling against austerity that are suffering a beating. Spain was singled out for especially harsh punishment, the 10yr yield climbing 30bp to around 6.25% at one stage and 5yr CDS at a record high of 540bp. Italy was also spanked; the 10yr yield 25bp higher at 5.75% with the spread to Bunds wider by 35bp. French, Portuguese and Greek bonds were also whipped. In contrast, 10yr bond yields in Germany, the UK, Sweden, Switzerland, Finland and the Netherlands all registered record lows.

Finding Europe’s inflexion point. Whilst the single currency has certainly suffered so far this month, it has not yet reached the point of capitulation or panic. Yes, it remains true that EUR/USD has fallen on all but two trading days so far this month but at the same time it’s the high-beta currencies that have taken more of the pain, the Aussie, Kiwi, scandis and Mexican peso all losing ground against the euro. On this basis it looks to be more a global re-rating of risk, of which the euro crisis is playing its part, but this will more likely than not change in the near future. At the present moment, Greece is still trying to form a government more than a week after the election result. Belgium managed for well over a year in 2010/11 without a formal government, but Greece can’t be afforded the same leeway.   There are two choices. Either a coalition is formed from the current make-up of parties or fresh elections are called, most likely for next month. Even if a government is stitched together in the coming days however, it’s unlikely to be strong enough to appease international lenders such as the EU and IMF. What we have seen so far this month are some notable shifts though, most of which fail to fight against the possibility of Greece exiting the euro.   This prospect has been openly aired by some ECB members, a key shift away from the previous stance of not countenancing such a possibility.   In addition, last week the IMF announced it was adding to its reserve in the face of the growing credit risk it’s facing. At the same time, there were hints from Germany that it may be prepared to tolerate higher inflation, playing its part in reducing the competitive imbalances that are near the core of the euro crisis.   On the face of it, this has been seen as a major shift in German thinking, not least given the long-held desire to run monetary policy in the eurozone along German lines. But, put into context, this shift is too little and too late in terms of offering an exit route from the sovereign crisis. Right now, we face two possible inflexion points. The first is when Germany and the ECB relent and effectively ditch the ‘no bail-out’ clause that has been enshrined from the start of the single currency.   In other words, allowing countries to assume the debts of others, via whatever means. The second is when markets reach the point where they believe the EU and international lenders have run out of road in terms of their ability to keep the single currency together.   At this point, the euro would not only weaken, it would weaken against even the high-beta currencies. We’ve not reached either inflexion point yet, but the second is looking a lot nearer, more likely and more credible, both economically and politically.


More on gold. On Monday, spot gold moved below last year’s closing level of $1,564.   You have to look back to 2004 for the last time gold was down at this point in the calendar year.   Of course, a fair degree of recent weakness can be attributed to the gains on the dollar, the main dollar index up over 2% so far this month.   There has been some inertia from funds (such as ETFs) to dump physical holdings, but should this change then gold could be subject to further downside pressure. Furthermore, the break below the long-term trendline support, drawn from the late-2008 lows, means that the longer-term uptrend in gold has been broken.  Priced in other currencies (euros, rupees), the long-term picture may not look as bleak, but these crosses are worth watching in coming weeks. In rupees for example (India is the 2nd highest gold consumer after China), gold is still up 1.6% on the year.