Turn Around Tuesday Challenged?

Turn Around Tuesday unfolded in Asia and early Europe as equity markets gain (after the 1% loss in the US on Monday) and the euro and dollar bloc currencies rallied.  However, news that Greek opposition leader Samaras opposed additional austerity measures, but would suipport state asset sales, is proving challenging. This stalled the euro's momentum and prompted some retracement of its gains.  Support is seen ahead of $1.4050.   On the upside a move above $1.4160-75 is needed begin healing the technical damage. 

The European data stream has been limited to the stronger than IFO survey in Germany and the softer than expected March industrial orders for the euro zone as a whole.    The recent string of data suggest that after a strong start the euro zone growth momentum faded as Q1 drew to a close and started Q2 softly.

UK news is more uniformly poor. Moody's placed 14 of 18 UK banks and building societies on watch for possible downgrades.  This includes state-owned/controlled institutions on the logic that the government has indicated that investors should not count on more tax payers capital in the event of a future crisis. 

Separately the UK repored a record large budget deficit in April.  While there does appear to be some mitigating factors, the issue is whether austerity is going to promote the kind of growth that increases government revenues and allows counter-cyclical spending to fall.  The UK economy stagnated over the past 6 months (Q4 10 and Q1 11).  

I may be cyncical in noting that the BOE has effectively suspended its inflation target in practice, but I suspect the government is quite happy.  Imagine if the BOE had tightened monetary policy to rein in inflation. 

In recent days, Spanish debt has appeared to be increasingly drawn into the periphery and the anxiety around last weekend's election has not helped.  However, today's bill auction was greeted with a solid reception, with lower yields than last month in the 6 month bill, for example.    Perhipheral ten year bonds--Greece, Ireland and Portugal--remain under pressure today.

For a few reasons, like debt ceiling manuevering, regulatory changes, and few alternatives, US bill yields have approached zero.  The 3-month bill yields 5 bp and the 6 month bill is 10 bp.  The 1-year bill yield is 16 bp.  Effective Fed funds are at 10 bp.    This puts US bill rates below Japanese bill rates.  To be sure these are not the rates used to calculated forwards and it does not seem to be hurting the dollar against the yen.  That said the greenback is turning down against the yen, as it is against the other major currencies.  Three times in the past four sessions the market has tried to establish a foothold above JPY82 and has failed.  Initial support is seen near JPY81.60 then JPY81.20.