- Consolidation may give way to risk aversion
- BIS capital reforms may hit Euro-area banks
- Eurozone debt concerns resurface
- Democratic Party of Japan’s Election and the JPY
- Key data and events to watch next week
Specifically, he got me a little concerned about what's happening across the pond in the EU. Bond spreads have been widening significantly of late, highlighting a lot of the damage that has been done to the Euro and the tough economic times that lie ahead for the Eurozone region. Here are his specific comments and bonds and credit default swaps danger ahead.
This past week saw a continued widening of Eurozone peripheral bond spreads relative to Germany. The spreads have been widening since the end of July, however recent news helped to push some of the spreads to record levels. A report on Tuesday showed that the European stress test results released by the Committee of European Banking Supervisors (CEBS) may have understated some holdings of sovereign debt. Tuesday saw the 10-year yield differentials between Portugal and Germany rise to record levels around 354 basis points and the differential between Ireland and Germany 10-year yields climb to around 372 basis points – also record highs. This highlights the ongoing sovereign debt concerns in the Eurozone which has weighed on the common currency and risk sentiment. The spreads between Greece 10-year yields and their German equivalents also advanced to levels which have not been seen since the height of the sovereign debt crisis back in May. This highlights that structural issues of the peripheral countries remain present.
At the same time yield spreads are widening between the core and periphery nations, sovereign debt credit default swaps (CDS), which are a measure of the risk of default, are reaching elevated levels for the peripheral-EU. Tuesday saw Ireland’s 5-year CDS reach record highs of roughly 382bps. It is also of note that Greece, Portugal, and Spain 5-year CDS have all increased this past week. The heightened CDS are not a factor of new sovereign issues but rather a reminder that fears continue to lurk under the surface.
The elevated yield differentials and CDS should keep the euro under pressure in the week ahead. EUR/USD has consolidated over the past few days, confined to a tight range that is supported by its 100-day sma and capped by resistance in its 21-day sma. While the bias is to the downside we would note the risks to the upside as a potential bull flag consolidation pattern is also evident. Key support levels are the 100-day sma and 23.6% retracement level of the move from the November 2009 highs to June 2010 lows which converge around 1.2650. Below here is likely to see to the 1.2400-1.2430 area which is the bull flag support and 61.8% retracement of the rally from June lows. The 21-day sma and Kijun line come in around 1.2750-80 to provide immediate resistance for EUR/USD. Above here may see to bull flag resistance around 1.2850 and then to the daily Ichimoku cloud top around 1.3030.
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