- European Stocks Decline, Trimming Seventh Weekly Gain – Bloomberg
- Top 2% Not Job Creators or Millionaires in Tax Debate – Bloomberg
- Kim to Reform North Korean Economy after Purge – Reuters
- BoE Pushed Back on Tougher LIBOR Overnight – WSJ
- Spain’s Recession to Linger as Austerity Bites – WSJ
Asian/European Session Summary
Markets were relatively stable through the early part of the European session today, with high beta currencies and risk-correlated assets trading only slightly lower relative to safer assets by 06:00 EDT / 10:00 GMT today. However, it took only a small catalyst – the official approval of a €100 billion aid package for Spanish banks – to completely obliterate risk-appetite. Yes, on the official announcement of the Spanish bailout, markets fell, and they fell hard.
One needs to look no further than European credit and equity markets to see the carnage that took place in the second half of the European trading session. The final tallies for today across European stock markets:
- Spanish IBEX: -5.82%
- Italian MIB: -4.38%
- French CAC: -2.14%
- Euro Stoxx: -2.83%
The reaction we’re witnessing across the globe today, especially since the Euro-zone finance ministers officially announced the bailout deal this morning, offers insight into what we should expect (and have expected) going forward: it’s as simple as ‘buy the rumor, sell the news.’ In mid-June, the market got wind that Spain would be bailed out, which in reality is just another liquidity injection. Now that the liquidity injection is in the rearview mirror, and there’s no definite milestone to look forward to, risky assets have been dumped in favor of the Japanese Yen and the US Dollar. Without the promise of government or central bank intervention, market participants time and again have proven unable or unwilling to hold assets correlated to the European debt crisis; we thus believe, barring a major QE program from the Federal Reserve, EURUSD rallies should be sold.
As expected, the EURJPY and EURUSD have slid sharply, with the latter falling as low as 95.38, its lowest level since December 2000, and the former falling as low as 1.2144, its lowest level since June 2010.
Taking a look at credit, peripheral European debt has been pummeled just like equity markets. The Italian 2-year note yield has moved higher to 3.856% (+36.1-bps) while the Spanish 2-year note yield has soared to 5.623% (+61.3-bps), now at its highest yield over the past three-months. Similarly, the Italian 10-year note yield has risen to 6.134% (+16.2-bps) while the Spanish 10-year note yield has shot up to 7.185% (+25.8-bps); higher yields imply lower prices.
EURUSD 5-minute: July 20, 2012
Charts Created using Marketscope – Prepared by Christopher Vecchio
The Japanese Yen is the top performer today, with the USDJPY falling 0.11 percent. The Euro is the worst performer, shedding 0.90 percent against the US Dollar. Similarly, the USDCHF has rallied 0.87 percent. The commodity currencies have held up relatively well, with the Australian, Canadian, and New Zealand Dollars posting losses of 0.48 percent, 0.45 percent, and 0.51 percent against the US Dollar, respectively.
Key Levels: 17:00 GMT
Thus far, on Friday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 10094.70 at the time this report was written, after opening at 10067.03. The index has traded mostly higher with the high at 10102.88 and the low at 10051.54.
--- Written by Christopher Vecchio, Currency Analyst
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