- EUR/JPY buckled in European trade as the yen’s shorts rolled over due to heightened risk aversion following a sell-off in European bourses lead by concerns over Italian banks and general equity rout – The DAX has booked its lowest levels since December 2016.
- European bank shares have been notable underperformers today, reflecting the rise in the BTP/Bund spread and the pain across Italian banks.
The chair of the Supervisory Board at the European Central Bank, Danièle Nouy, said Tuesday “let’s keep our fingers crossed” for Italian banks amid fears the bond spread’s rise due to a budget row with the EU will impact them.
Italian 10-yr yields jumped 10bp and to just 8bp below the peak since the Italian coalition announced its budget plans that violate the EU/EC rules leading to the widest 10-year spread to bunds since Mar 2012. However, Danièle Nouy said, “So far I don’t think the spread has reached a level of serious concern for the banks, but we don’t know what the future will bring.”
She added, “It would be very sad”, she said, if Italian banks, which have “made many efforts” to clean up their balance sheets,” were hit by the consequences of the political debate. “But they are things that happen, the Greek banks’ problems started with political discussions and so I can only say let’s keep our fingers crossed”.
Meanwhile, stocks across Europe and the US have taken a beating fuelling risk aversion and sending the yen higher which hurt EUR/JPY. The Stoxx Europe 600 fell 1% after closing at a three-week low on Monday while the DAX index dropped 1.5% to mark the lowest level since Dec 2016 as 2018 gains have been wiped off the board in the US as big tech names tumbled, making for losses in similar stocks across European bourses. However, there has been a correction in risk and EUR/JPY managed a bid to 128.59, although EURJPY probably has a some room to push lower and is currently testing back below 128.20 with traders eyeing deeper support near 127.50.
EC will be taking its final decision on Italy’s budget on 21 November
The European Commission will be taking its final decision on Italy’s budget on 21 November and that might prompt a drastic change one way or the other. If the Commission decides to impose sanctions (0.20% of GDP deposit, plus a freeze on billions of Euros in EU funds), the euro and euro crosses are likely to feel be heavily penalised – (It will be worth monitoring the Italy 10Y yield and weekly chart. The market has been probing an 8-year pivot at 3.71, which is a major resistance. The day’s range has been 3.589 – 3.711% vs a previous close of 3.62%).
EUR/JPY levels
Analysts at Commerzbank explained that EUR/JPY continues to be side-lined above the current November low at 127.50 below which the four month support line can be spotted at 127.17:
“Further down lies the October trough at 126.64. Our bias is neutral – signals are conflicting. Initial resistance is the November 14 high at 129.23. Above it meander the 55- and 200-day moving averages at 129.77/98. To reassert upside pressure the market will need to overcome the 130.15 7 th November high.”
Share
