Positivity reversed as Europe unable to find solution

Thursday 31 May 2012

Positivity reversed as Europe unable to find solution
By Ben Taylor (Sales Trader, CMC Markets)

The positive start to the week which started with support through equity valuation and stimulus in China has reversed as European leaders remain unable to provide sufficient solutions to solve their own economic health.

Fear has definitely got the market around its little finger today. The Spanish Flu has set in as Spanish 10 year bond spreads blow out over the German 10 year. The current spread is non-sustainable and it’s widely assumed that a Spanish bail out is now likely.

The financial sector is the worst performing today as Moody’s probes the financial strength of lenders mortgage insurance providers. The review will consider the risk imposed by high property values and elevated debt levels attained by Australians. Brokers are also moving negative on the banks considering the lower growth environment, potential for margin squeeze and the difficulty to foresee a change in economic conditions.

The blow out in Spanish yields have today significantly increased the chance of a 50bp cut at the next reserve bank meeting on 5 June. The market is factoring in material falls in interest rates over the next year. A rate lower than the 3% touched during the GFC is now likely within 12 months.

The rug seems to have been pulled out from underneath the Euro as it descended to a two year low today. The fall has taking the Australian dollar with it as money swiftly moves away from risk currencies into the US dollar. US ten year bonds reaching 1.65% is a record low and provides evidence of the fear currently factored into our market.

The focus will shift temporality to the US tonight and tomorrow as we watch for the Q1 GDP revision number tonight as well as the Non Farm payroll result tomorrow. A dip in the US GDP below 2% now does not seem out of the question and payroll numbers close to 150k are expected.

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