Portuguese debt is among the highest in the world and Spain is the 4th largest economy in the Euro zone so further attacks on these countries’ bonds could exacerbate the problem much worse than what we saw from Ireland. Expect more volatility in the market as further details of the Irish bailout are released.
There’s not a lot of economic data due out today in this shortened holiday week here in the US. Markets are mixed this morning with stocks and commodities lower and specific weakness in both the Pound and the Euro.
In the forex market:
Aussie (AUD): The Aussie is surprisingly higher as the market appears to be leaning toward risk aversion this morning. This week is a light week for economic data from Australia, so perhaps they are benefiting from Euro and Pound money flows this morning.
Kiwi (NZD): The Kiwi is lower across the board as S&P downgraded NZ’s credit-rating outlook to negative, citing a reduced outlook for global demand. (Click chart to enlarge)
Loonie (CAD): The Loonie is mixed as oil is slightly lower this morning but like the Aussie may be catching a bid as investors seek places to stash their dough. Tomorrow is a busy day of data in Canada, as retail sales and CPI data are on the docket.
Euro (EUR): The Euro is lower despite the news of the bailout for Ireland, as now the question of contagion becomes the bigger issue. While there is some data due out for the region this week, the more pressing concern is structural in nature, as the Euro hopes to avoid the type of declines that we saw earlier this year. (Click chart to enlarge)
Pound (GBP): The Pound is also lower as the UK’s close ties to the Irish banking center and the threat of contagion is weighing on the currency and stocks alike. Wednesday is the UK GDP report which will provide further insight into the health of the UK economy as austerity measures begin to take place.
Dollar (USD): The Dollar is mostly higher as would be normal in a risk aversion scenario. This is a holiday week her in the US with Thanksgiving on Thursday, so most of this week’s data will be released tomorrow and Wednesday. Tomorrow is GDP and personal consumption data along with existing home sales, with Wednesday bring durable goods orders, initial jobless claims, and the U Michigan confidence survey.
Yen (JPY): The Yen is mostly higher though in recent times it has not behaved like we would expect from a “safe-haven” currency. Thursday is CPI data so we will get a better idea of how bad deflation is in Japan.
As the market begins to learn more about the details of the Irish bailout, the focus will now turn to both Portugal and Spain as they are the two most vulnerable countries in the Euro zone. Unless the EU comes up with some type of plan to keep bond yields from rising (perhaps a short ban?), we are likely to see these two flirt with disaster.
While Portugal is in much worse shape than Spain, the latter is a much larger economy so market participants may feel emboldened to strike at the bigger prize. The Spanish economy is still mired in a major housing bubble and has rampant unemployment. If the ratings agencies decide to take aim at either country, it could get the ball rolling downhill.
With the Thanksgiving holiday here in the US likely to slow the markets down toward the end of the week, we could see some added volatility. I seem to recall last year there was some news (can’t remember what) over the Thanksgiving holiday that induced risk aversion, so be cautious heading in toward the end of the weekend.
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