Euro Bounces; Like a Dead Cat?

The US dollar is somewhat softer today as the market takes a pause to consider recent developments. News that Fitch reaffirmed its AAA rating for Spain, despite S&P’s move yesterday, and heightened speculation that European officials are working on a larger multi-year fund for Greece, and a relatively smooth Italian bond auction, are helping to calm the foreign exchange market for the moment. Sentiment toward the euro remains poor, but many seem increasingly reluctant to add to short positions, fearful of a short-term bounce on some news development that would offer a better selling opportunity.

With Tokyo markets closed today, the yen is also in a consolidative mode. Some suggestion that UK Prime Minister Brown’s gaffe may reduce the risk of a coalition government may be offering sterling support is probably more wishful thinking, especially ahead of tonight’s television debate.

Equity markets are mixed today. The MSCI Asia-Pacific Index excluding Japan extended its losing streak to the third consecutive session with a 0.3% loss. The commodity and telecom sectors were the weakest. While many of the large markets lost ground, including China, Korea and Taiwan, many of the smaller market, including Malaysia, Thailand and Indonesia managed to post modest gains. European bourses are mostly around 0.3%-0.5% higher. All the sectors represented in the Dow Jones Stoxx 600 are higher. Telecom and consumer good sectors are leading the advance. Of note the Athens market is posting around a 5% gain, with financials up nearly 8%. This illustrates the corrective forces at work today.

This conolidatve/corrective tone is evident in the sovereign bond markets, where peripheral European bonds are firmer, with Greece and Portuguese bonds doing the best. Italy’s bond auction was alright and in any event better received than the bill auction earlier in the week. Note that tomorrow Italy has a large 13 bln euro maturity and Spain makes a 1 bln euro coupon payment. In the current environment, there is a risk that some of the funds flow out of the euro zone and potentially a weight on the euro itself.