Risk sentiment is dropping, starting with the Asian session after Fitch comments suggesting that the sovereign debt crisis is likely to spread to more countries and that it has the potential to lead to credit downgrades for banks in the United States. The only positive in the statement was the assertion that US banks have reduced their exposure to troubled European assets. Either way, the comments wound up being the driving factor on the day as even the strong Industrial Production number out of the US could do nothing to change price trajectory.
The macro data should be given attention, however, even if markets are not putting most of the focus there in the short term. Inflation in the US came in at an elevated 3.5% for the headline figure but the core figure showed more evidence of price stability. Treasury inflows also beat market expectations but matched our estimates mentioned yesterday, which were based on the recent strength seen in the US Dollar. Today, the macro calendar is much lighter and there are no scheduled monetary policy meetings, so we could see some consolidation of yesterday’s declines (i.e. a decrease in price volatility).
One potential point of activity could come from the Treasury bond auctions that will take place in Europe, so any news flows from this could be paid attention. In Italy, Mario Monti assumed his new position as prime minister (backed by a technocrat cabinet) and markets will be watching his comments closely to gauge his plans to solve Italy’s debt issues and the probability of achieving political majorities in what could be described as a fractured government. Ranges in the EUR/USD have moved down to 1.3420-1.3480 while the USD/JPY remains heavy at 76.90-77.10.
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