Forex Market Commenmtaries - Doubts Remain Over Eurozone Solvency

Doubts Remain And The Narrative Resumes Versus Europe's Solvency

Dec 12 • Market Commentaries • 1191 Views • No Comments

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European equities and U.S. equity futures have fallen in the morning session whilst the euro weakened as Moody’s Investors Service reported that it will review ratings for countries in the region post last week’s summit. The overall bearish mood has been accentuated as Italy and France prepare to sell debt in today’s sessions. Commodities have subsequently retreated from their recent rally.

Overview
The Stoxx Europe 600 Index had dropped by circa 1.0 percent at 9:40 a.m. in London. Standard & Poor’s 500 Index futures had lost 0.9 percent. The euro had depreciated by 0.8 percent to $1.3275. The Italian ten year bond yield jumped 19 basis points, the extra yield investors demand to hold similar French notes instead of benchmark German bunds rose seven basis points. The cost of insuring versus default on European government debt has this morning approached a record high. This morning’s decline in the S&P 500 futures has signalled that the U.S. equity benchmark could trim the 1.7 percent gain made on Friday Dec. 9. The index has now climbed for two straight weeks..

Foreign exchange strategists and analysts are slashing their forecasts for the euro at the fastest pace this year due to European Central Bank President Mario Draghi’s interest rate cuts removing one of the currency’s pillars of support. Since Nov. 3, when Draghi began to undo the rate increases implemented earlier this year by his predecessor Trichet analysts have reduced their end of 2012 estimates for the euro to $1.32 from $1.40, based on the median of 40 forecasts in a Bloomberg survey as of last week. It has weakened versus every major currency except the Swiss franc since then, after gaining against 12 of the 16 this year prior to that.

Bets that the euro will drop against the dollar have also increased in the options market. Traders paid 3.6 percentage points more on Dec. 9 for the right to sell the euro against the dollar than to buy it, up from about 1.2 percentage points in January. Dollar funding costs for European banks increased after the summit amid concern the measures won’t be enough to stem the crisis. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, ended last week at 122 basis points below the euro interbank offered rate, from 117 basis points the day before. The measure reached 163 basis points on Nov. 30.

 

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The two year Italian note yield climbed 22 basis points as the government prepared to sell 7 billion euros of 365 day bills. Two year French and Dutch securities under performed German notes as the Netherlands readied an auction of as much as 4 billion euros of 107 and 198 day bills and France prepared to offer as much as 6.5 billion euros of 91 182 and 308 day instruments.

Market snapshot as of 10:45 am GMT (UK time)

The Asian markets experienced mixed fortunes in the overnight and early morning trading session. The Nikkei closed up 1.37%, the Hang Seng closed down 0.06% and the CSI closed down 1.03%. The ASX 200 closed up 1.18%. European bourse indices are down sharply in the morning session. The STOXX 50 is down 1.55%, the UK FTSE is down 0.75%, the CAC is down 1.2% and the DAX down 1.85%. ICE Brent crude is currently down $1.37 a barrel spot gold is down $28.38 an ounce. The SPX equity index future is down 0.8%

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