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MARKET COMMENTARY - 17th May 2012
Contributor / 2012-05-22 09:56:07
Euro Falls to Four-Month Low as Spain’s Debt Costs Rise
The euro fell to a four-month low as Spain’s borrowing costs rose at an auction, stoking concern that the region’s financial contagion is spreading from Greece. Europe’s shared currency remained lower against most of its major counterparts after Fitch Ratings downgraded Greece’s long- term credit rating to CCC from B-, citing heightened risk that the nation may not be able to sustain membership in the monetary union. There’s a lot of uncertainty about where Europe is headed on the political front, and markets are trading the uncertainty, which means that risky asset prices will fall. The euro was little changed at $1.2722 at 1:48 p.m. New York time after touching $1.2667, the weakest level since Jan. 17.
Spain sold bonds due in January 2015 at an average yield of 4.375 percent, compared with 2.89 percent when they were last auctioned in April. Investors bought bonds maturing in July 2015 at 4.876 percent, compared with 4.037 percent on May 3 and bonds due April 2016 at 5.106 percent.
Borrowing costs in Europe’s most-indebted nations are rising amid speculation that Greece will leave the 17-nation euro area as political parties opposed to the terms of two international bailouts polled strongly. A fresh vote has been set for June 17. The European Central Bank said it will temporarily stop lending to some Greek banks with President Mario Draghi indicating it won’t compromise to keep Greece in the euro area. Draghi acknowledged for the first time yesterday that Greece may exit. While the bank’s “strong preference” is that Greece stays in the bloc, the will continue to preserve “the integrity of our balance ECB sheet,” he said in a speech.
The repercussions of a disorderly Greek exit would be severe and of course unknown adding to the uncertainty. Mervyn King Governer of the Bank Of England and David Cameron UK Prime Minister yesterday blasted the Eurozone woes- King stated that the Eurozone is “tearing itself apart” as the UK downgraded its growth forecasts to align with the problems in Europe which is the UK’s main trading partner. David Cameron stated that it is “make up or break up” and the euro is at a “crossroads”. The change in tone from King and Cameron will be noted as the gloves are now off as the inability for Europe to get its house in order shackles the UK economy.
Europe’s financial crisis and its political fallout are shaping back-to-back international summits hosted by President Barack Obama on the global economy and military cooperation. Leaders in the Group of Eight -- with the notable exception of Russian President Vladimir Putin -- convene tomorrow and May 19 at Camp David, near Washington. Then, most will fly to Chicago, for a North Atlantic Treaty Organization meeting. Both are venues for Obama, who is seeking re-election in November, to show U.S. audiences he is playing a leadership role on foreign policy. Still, Obama may have little say over how allies address the euro region crisis, including proposals to revive debt-ridden Greece’s economy at the same time its political system is in turmoil over an austerity plan.
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