Markets are witnessing a slight improvement in sentiment on news that China are in talks with Italy over purchasing Italian debt as contagion looks set to spread to core nations within the eurozone. The news came as no surprise given China’s interest in, and exposure to, euro-denominated assets and as a result stock indices managed to rebound to some extent. However, given the fact that insurance costs for euro area government debt are spiraling, while French banks look set to suffer downgrades on their exposure to Greek debt, the situation remains at critical levels. The effects are already spreading, after August’s Australian business confidence index plunged to 2009 lows overnight on concerns of European woes. Such is the concern now, US Treasury Secretary Timothy Geithner is making an emergency trip to meet with eurozone officials to offer assistance.
Sterling
Eurozone jitters continue to fuel risk adverse trades and consequently the pound remains under pressure against low yielding safe haven currencies, falling to 19-month lows against the Japanese yen. Sterling did however manage to breach fresh six-month highs against the under pressure euro, having risen by over 3.5 per cent since last Thursday.
US dollar
The Federal Reserve’s Richard Fischer looked to place the onus on the US government to help deliver the next form of stimulus in order to help revive the US economy. Fischer made clear that fiscal policy must now be utilised and consequently further easing of monetary policy may not be required.
Euro
A key pillar behind recent euro strength had been the European Central Bank’s hawkish bias after already hiking interest rates twice this year. Last week’s monetary policy meeting marked a significant shift in stance with investors even considering the possibility of further easing as ECB President Jean-Claude Trichet persistently talks up growth risks. Crucially, with this support apparently removed, the single currency now looks extremely vulnerable as traders not only scale back on interest rate expectations but once again fear the possibility of contagion ripping through the shared currency area.
Japanese yen
In such an uncertain global environment, the yen remains elevated at near record highs although stabilisation in stock markets helped lessen the Japanese currency’s haven appeal. Nevertheless, at over 10-year highs on the euro and while creeping slowly towards recent post-war highs on the US dollar, yen gains will again test the resolve of the Japanese government as well as the Bank of Japan.
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