Market Uncertainty Send Equities Lower; Euro Drops to Significant Long Term Lows |
The Euro has seen massive moves lower to start the week and this continued during the Asian session after Monday’s meeting between EU finance ministers did little to ease the general concerns that are being seen in the current market environment. The EUR/USD has seen large increases in volatility, now trading at 1.3930-1.4060 with the USD/JPY dropping to 80.00-80.40. Treasury auctions in Italy Thursday will be the next event risk for the Eurozone, as analysts will then have an idea of the level of confidence the market has for the region.
Yesterday, 10 year bond yields in Spain rose to 6%, which is a first since the adoption of the Euro. German bunds, on the other hand, are seeing the opposite reaction as investors look for safe have alternatives for treasury investments. European equity markets also saw significant declines, and the S & P 500 followed suit, with a drop of -1.81% for the session. In macro data, we will see the FOMC policy meeting minutes today, but the key driver will continue to be the reactions to potential uncertainty in the Eurozone.
The EU meeting on Monday resulted in nothing new as far as policy changes, so for the moment the official response to the sell-off in equities and high yielding currencies is not being readily addressed. The statements following the meeting did not reference Spain or Italy specifically, and addressed only the Eurozone as a whole, which is another indication that the group of finance ministers does not appear overly concerned at the moment. The market response, however, was unfavorable and Monday’s sell-off continued.
One of the most interesting factors was that the finance ministers have stopped saying they are making plans to avoid a “selective default” rating from the major ratings agencies (for Greece), so this could be interpreted as a concession that this could be an inevitable reality down the road. This will likely strengthen Euro selling pressure as markets will now be unclear about the ways the ECB will react to this type of scenario. The German Chancellor (Merkel) released a statement suggesting that it is Italy’s responsibility to help to calm markets and make assurances that all of its debt obligations will, in fact, be met. The German Finance Minister (Schaeuble) dismissed rumors that the European rescue fund would be doubled.
In Japan, the BoJ left its policy rate unchanged (matching expectations) and there were no adjustments to its current government stimulus packages. The Yen saw some of the largest moves overnight, so it would not be surprising to hear intervention rhetoric at some point soon.
Technicals:
The EUR/USD has finally made its impulsive move, as prices plunged through daily support at 1.3960. Longer term, there is very little in the way of additional support until the historical level at 1.3750, which is followed by the weekly 61.8% Fib retracement at 1.3660. Momentum has clearly turned negative at this point but sell positions at this stage offer very poor risk to reward ratios. Sell rallies here or wait for the longer term support levels to enter into contrarian positions.
