New Week, One Issue Dominates: European Debt

Currency in Crisis

There is one main force in the capital markets today and it is European debt crisis.  The crisis is becoming deeper and broader.  Deeper in the sense that the Greek 2.0 is looking more difficult and some reports suggest that if the rating agencies will declare nearly any "voluntary" private sector participation as a "stressed exchange" and therefore at least partial default (selective default), European officials might has well consider bolder action now.  Broader, in the sense that pressure is building on Spain and especially Italy.

These forces are evident in the sovereign bond markets, CDS and financial shares.  Italy and Greece have bill auctions this week and Italy also has bond auctions.  This is of course

 all ahead of the bank stress tests to be released at the end of the week.  However, as the stress tests do not include a sovereign default, some wonder the merit.  This just adds to the uncertainty in the market. 

The euro itself has broken down through the bottom of the large triangle pattern, which I have mentioned before.  The bottom of the triangle is formed by connecting the late May lows, with the mid June and late June lows.  It comes in today near $1.4160.  That may now act as resistance.   Initial support now is seen near $1.4075 and then $1.40.  

Sterling posted an outside up day on Friday, but, while within Friday's ranges today, it looks to have reversed.  Support is seen in the $1.5900-30 area.,  

The dollar posted an outside down day against the yen on Friday.  But here too the follow through has been lacking.  The JPY80.50 offers support. 

Chinese data over the weekend showed higher than expected inflation (6.4% headline CPI, highest since June 2008).  Food prices are an important driver, up 14.4% and of that pork prices jumped 57% year-over-year.  Imports slowed to 19.3% year-over-year,the smallest in 20 months and  oil imports actually fell (-12%, for the first year-over-year decline).  Many observers read this to mean greater than expected slow down in the Chinese economy.  Yet, given China's propensity to export, the economic data may be more suggestive of weaker foreign demand.  

Lastly, a word about the US.  The jobs data was simply horrific.  Yet it is a lagging indicator.  The combination of lower gasoline prices, lower interest rates and easing of Japanese supply disruptions may help the economy here in Q3 return to above 2% growth.   Debt ceiling talks continue and there does seem to be increased likelihood that a short-term deal is struck to get into the presidential campaign next year.