Overnight markets are again characterised by a combination of independent EUR weakness and generally diminishing appetite for risk. Although off the low ($1.4015), EUR/USD is still 100 pips down from Friday’s close. Ostensibly, EUR weakness is attributed to the limited credibility of Friday’s bank stress tests and is mirrored in wider peripheral spreads (Italy +13 bps; Spain +20 bps). More generally, equities are soft (US futures -0.6%), leaving JPY the top performing currency in G-10, with USD not far behind. SEK is the worst performer, though this has more to do with general risk appetite than the Riksbank minutes, which added little to the policy debate.
White House and Republican leaders appear to have made little progress over the weekend in striking a deal to raise the debt limit, which is also weighing on risk sentiment. The House plans to vote on July 19th to increase the debt ceiling. Press reports suggest that President Obama has already moved to the centre in the budget debate and if press reports are correct, he is looking for $400bn revenues in a $2.0 trillion deal (20% revenues) or $1.0 trillion in revenues in a $4.0 trillion deal (25% revenues). While the US officially runs out of time on August2nd, a failed vote this week could trigger risk aversion and lead to short-term erratic moves.
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