Capital Markets Overivew

The US dollar is narrowly mixed as a nervous pall hangs over the market. The European debt crisis remains front and center and the euro has been unable to resurface above the $1.30 level today after it gave way in North America yesterday. Like yesterday, the Swiss National Bank seems determined that the flight to safety does trigger franc appreciation. Sterling has been aided by demand against the euro. The euro broke below GBP0.8600 yesterday and has been unable to recapture that level, while cable has been largely confined to a $1.5100-$1.5200 trading range for the past 24 hours. The JPY95.00 level remains intact, but the yen’s ability to draw much safe may be limited by concern about Japan’s own debt rating and tensions on the Korean peninsula.

Global equity markets are under pressure. Japan, South Korea and Thailand are closed today. The MSCI Asia-Pacific Index, ex-Japan slumped nearly 2% as all ten industries represented fell. Of note, China’s Shanghai Index managed to buck the trend to post a 0.77% rise. European bourses are lower, but the losses are more modest than yesterday. The Dow Jones Stoxx 600 is off about 0.4% near midday in London, with basic materials and oil and gas turning higher, but other sectors led by consumer services and financials lower. US shares are also stabilizing after yesterday’s slide.

It is in the debt markets where the European strains are still being felt. Southern European bond markets remain under pressure and the flip-side is the demand for German bunds. The Germany 2-year yield is at a new low of about 63 bp, while the 10-year yield of 2.91% is near a 14-month low. That said, the Portugal six-month bill auction was adequately absorbed with an almost 2:1 bid-cover ratio. The US 10-year yield is trading near 2-month lows, despite the stronger the recent string of stronger than expected economic data.