Euro Slides, risk Aversion Rises

The US dollar is broadly higher against most major and emerging market currencies today, with the yen and Swiss franc being the notable exceptions. With last week’s US employment data taking the immediate focus off the US and the potential for QEII, the market has been able give full attention to the negative European developments, which include new questions about the stress tests, concerns over the amount of capital that will need to be raised under Basel III, and reports suggesting euro zone governments will seek to raise 100 bln euros this month, roughly twice the amount raised in August.

Weak German manufacturing orders were sufficient to push the euro through support near $1.2750 and, although short-term technicals are over stretched given the nearly 2 cent pullback from yesterday’s highs, new lows are likely in the North American session. The $1.2580-$1.2600 is seen a critical support and the European high near $1.2820 may cap upticks.

Sterling is pulled in both directions today, with the negativity of the demise of the large property company being blunted by the anticipation of some M&A flows and better BRC sales figures. Support near last week’s lows (~$1.5325) remains intact the next target comes two cents lower. Meanwhile the market is hesitant about selling dollar-yen aggressively below JPY84. Watch the JPY106.70 trendline support for the euro. If that goes it could help send the euro through the $1.2750 support.

Global equities are trading heavier. The MSCI Asia-Pacific Index snapped a four-day advance with a 0.2% decline. The Nikkei fell 0.8%, the largest decline in the region, while the Philippine market continued to be the best performer in emerging Asia with a gain of the same magnitude. Over the past five sessions it has gained almost 6%. Foreign inflows have increased markedly over this period. China’s Shanghai Composite edged slightly higher, reaching a fresh 4-month high. European bourses are being sold from 4-week highs, led by a sell-off of financials and basic materials. Most bourses are off by around 1% near midday in London and the early call is for US indices to open around 0.5% lower.

Most bond markets are higher today, though peripheral European bonds are weaker. Even Japanese government bonds have rallied with 10-year yields coming off 5 bp from an eleven week high. JGBs are the worst performing G5 bonds over the past month, with yields 10-yields up 9 bp, even after today’s decline. This compares with a 16 bp decline in 10-year Treasury yields and a 23 bp decline in 10-year German bund yields and a 28 bp decline in 10-year UK gilt yields. Irish and Greek and Portuguese bonds are under the most pressure, with Spain and Italy little changed.