Danske Markets | Nov 24, 2011 04:54AM ET
According to Bild Germany is concerned it may have to accept euro bonds. The failed Bund auction puts pressure on Germany to accept euro bonds and other euro member states are likely to intensify the pressure on Germany now.
As the euro crisis escalates there are signs of contagion to the rest of the world. CDS on US banks are climbing higher on concern of exposure to eurozone debt. The CDS on Bank of America rose to a new high of 495 compared with a previous high of 465 in October.
The intensification of the euro crisis sent stock markets into further decline as well. S&P500 closed down more than 2%. Slightly softer US data for durable goods orders and personal spending also weighed on the market.
Asian stock markets rebounded somewhat overnight, apart from Nikkei that was closed on Wednesday and is now catching up with yesterday’s declines. Markets got a small lift from a cut in the reserve ratio for six rural banks in China, which is seen as a sign that more easing could be in the pipeline in China as growth worries increase and the inflation concern is decreasing.
US 10-year bond yields fell further by 5bp overnight to 1.88% before closing for Thanksgiving today. Falling risk appetite and a strong 7-year auction supported the treasury market.
In FX markets EUR/USD came under pressure yesterday and fell below 1.34. USD/JPY moved lower overnight while Scandi currencies are broadly unchanged.
Fixed income markets: Yesterday Germany failed to get bids for 35% of the 10-year bonds offered for sale. Some interpreted the disastrous outcome as a sign that the eurozone crisis is driving investors away from the region. We still see strong demand for German bonds but yesterday’s result indicates that there is a limit for everything. Today Sweden will issue Linkers in the June 22 maturity. This issuance will most likely be better received in markets.
FX markets: The strong support-level at 1.34 in EUR/USD was not able to hold yesterday afternoon. The combination of low eurozone PMI-numbers and not least the weak German bond auction weighed on the euro. The rising German yields might be the first indication that investors are no longer just moving their money into Germany away from the debt-troubled countries, but actually out of the eurozone. If that is the case it could spell further trouble for the euro going forward. We are still seeing EUR/USD heading for 1.30 on a 3M horizon. Today the direction for EUR/USD will be set by the German Ifo and of course the development in Italian and Spanish yields.
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