A Little of Everything

The US dollar is broadly mixed in still volatile market conditions. The euro has been boosted by indications of a G7 conference call. Sterling has been punished in the wake of the indecisive electoral outcome. The yen has weakened as the BOJ injected one-day liquidity for the first time since December. Although there are some large moves today in the foreign exchange market, it is not the panic conditions seen yesterday. However, tensions continue to run high and the tone is fragile. Canada reported a huge jump in jobs. The 108.7k was four times greater than the market expected and sent the Loonie sharply higher.

Global equity markets are lower in the wake of the steep US losses yesterday as investors moved into capital preservation mode. MSCI’s Asia-Pacific Index fell 1.4% to its lowest level in around 2 ½ months. Financials alone accounted for about a third of the decline. The more than 6% decline this week wipes up the previous year-to-date gains. In Europe, although most bourses are 1-2% lower, financials are holding in, helped by a favorable earnings report. Basic materials are also performing relatively well, though all 10 of the major industry groups are lower.

Debt markets remain stressed. Peripheral European spreads over Germany continue to widen. Greece’s 2-year yield is up 214 bp today to 18.4% and the 10-year yield is up 114 bp at 12.42%, just to give an example of the most extreme case. Kind words by Moody’s about Italy may have helped take pressure off of Italy’s 2-year notes, which are now firmer on the day, but the spread at the 10-year over Germany is wider and now is at its widest since prior to EMU. However dramatic the bond market is a more immediate problem is funding. The funding problem is not nearly as bad as in late ’08, but there is clear pressure here that is both a cause and effect of the more volatile market conditions.