Euro Falls after Merkel Comments on Greek Aid and Portugal Contagion

European stock markets continue to fall after concerns the European debt crisis is spreading to Portugal, Spain, Ireland and Italy. German Chancellor Angela Merkel said yesterday that she won’t release the aid funds to Greece until that nation has a sustainable plan to significantly reduce its budget. This comes after the unpopularity amongst German people regarding the aid package and the potential for the crisis to spread with more aid being needed.

Comments from an interview by the German Finance Minister where he mentioned that the aid package to Greece can still be rejected have hit on the hopes of the Greek PM to receive the aid before the country enters into a default to creditors. The problem for Germany is not Greece, but what its default could trigger, likewise does supporting an aid package put them on the hook for more countries requesting a bailout.

Portugal, with a higher debt burden and a slower growth rate in the past 10 years is the next in line to ask for a bailout as the Greek contagion has made Portuguese bond spreads double the past years average in a month. The main concerns in Portugal’s economy are the household and corporate debt ratios (higher than Greece and Italy) and a dismal savings rate.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the most actively traded currencies in a ‘whippy’ trading range. The USD$ is higher against the EUR -0.14%, , GBP -0.49%, CHF -0.17% and lower against JPY +0.22%, The commodity currencies are weaker this morning, CAD -0.13%% and AUD -0.33%%. The loonie continues to hover close to parity as the European debt crisis spreads, but the drop in commodities has depreciated the Canadian currency since yesterday. The drop in commodities also affected the AUD even as the market expects the RBA to increase rates in their next meeting in May (0.9247).

Crude is lower in the O/N session ($83.320 down -88c). US Dollar strength has put downward pressure on oil as an alternative investment, as well as forecasts pointing to an increase in inventories. The combination of US Dollar strength and US growth weakness paints a negative picture for crude demand. Equity markets in Europe were falling and are taking commodities with them.

US Dollar strength has reduced the appeal of Gold as an alternative investment even as inflation signs around the globe have given Gold ($1152.70) some of its luster back as a hedge. Palladium fell 50 cents after it reached a new two year record level as there is a growing demand from automakers in China.

The Nikkei closed at 11,212.66 up +46.87. The DAX index in Europe was at 6,292.78 down –39.32; the FTSE (UK) currently is 5,701.16 down 52.69 The early call for the open of key US indices is lower.

Note: Dean will be away traveling for the next two week’s and will return to publication on April 29th.

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