EURO headache intensifies

Political progress in Europe has seemingly stalled. Italy’s next premier, Mario Monti, is facing resistance on forming a cabinet. Along with Greek opposition leader, Samaras, who has reportedly told his members that he would not sign a written pledge that the EU requires before the next tranche of aid will be disbursed, is weighing on risk sentiment this morning. You might as well throw in the IMF warning on vulnerabilities in the Chinese banking system and the PBoC’s decision to fix dollar yuan to a two week high. Lest we forget, there is also the CDS’s and cash yield market spreads widening.

Capital markets are again painting a bleak picture for the majority of EU sovereigns. As described by a few, the sovereign market now consists of Germany and Holland in the core, with France and Austria in the second tier, Spain, Italy and Belgium in the third tier, while bail out countries have their own fourth tier. It really does not matter what structure you create, spreads are widening unabated it seems.

French 5-year BTAN’s have come under attack from Asian accounts. To bunds, Austria is trading at a record on whispers of a possible downgrade. Italy, is far from being immune with Asia, Middle-East and real US money wanting to take their 10-year yield higher. This is a carbon copy of last weeks ballooning yield fiasco. Spain will now become “the” concern ahead of their Thursday’s auction. Cash yields are back to August’s record highs while CDS have widened to another new record. With the ECB missing in action, spreads remain vulnerable in both the cash and CDS market for the sovereigns.

This mornings data shows that German economic expectations deteriorated more than forecasted this month (-55.2 vs -48.3). The ZEW index fell for the ninth consecutive month on the back of the Italian and Greek Government crisis and the EU sovereign debt problems. Fundamentals it seem are “playing second fiddle to peripheral carnage”. That being said, market is very much interested in US retail sales release later this morning while the EUR heads unimpeded towards its short term target of 1.3484.

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