Fx markets remain hostage to shifting headlines and persistent evidence of contagion in european debt markets. Deeply concerning to traders is the aggressively rising funding costs across europe. Yesterday's spanish 10yr bond auction came in at 6.975 (out pacing the recent Italian auction), while bid to cover was an uninspired 1.54. In Italy, the new technocratic government, lead by Prime Minister Monti, took a big step forward by passing his first confidence vote. In his prepared remarks to the senate, Monti would look to reinforcing fiscal discipline, assist potential growth, and move forward a more populist agenda by setting taxes. Italian government yield spreads vs. German counterparts, rallied somewhat in reaction to Monti’s statements, but still remain extremely wide. However, the optimism was short lived after comments from the opposition, suggested that their support would be withdrawn, should Monti adjust certain tax on individual earnings. In addition, with media highlighting student protests in Italy, traders are speculating if reform and austerity measures can actually be pushed through before a wider general election is demanded. The ECB, through it's SMP, continues to take an active role in the secondary Europe sovereign debt market. Currently, the ECB action has been aimed at stabilizing the markets, rather then actually lowing yields. And as a result, their balance sheet is expanding aggressively. On one side of the debate, are those that say the ECB should completely become Europe's "lender of last resort". However, Germany and many within the ECB reject this strategy. Angela Merkel stated that even if the ECB should take on this role, it would not solve the eurozone crisis. She then went on to say that treaty changes must be made that would require deep budget integration and fiscal integration. But the market is fully aware that any treaty change would take months and would be unlikely to stave off the crisis playing out right now. Today, will be a light day for scheduled events and economic releases, which will keep traders watching for further erosion in risk sentiment as seen through the rates, equity and commodity markets. Dodging random headlines and rumors will be the name of the game today. ECB President Mario Draghi will be speaking and traders will be listing for any clues of how the new chairman feels on the recent expansion in the ECB's bond purchases. On a final note the saga of the Troika continues with further reports that the next tranche will not be delivered until december and only if demand measures are meet. This doesn't give Monti much time. Earlier in the week demands by the EC for a written commitment by greek policy makers to push forward with reforms was rejected. A move that hurt european (and IMF) confidence that they were just handing out cash. The Trioka will arrive in Athens today to resume talk with the next government and review progress.
By
M.Zohaib Gadit
Forex Trading Consultant
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