The U.S. dollar is somewhat softer Thursday as the market takes a pause to consider recent developments. News that Fitch reaffirmed its AAA rating for Spain despite S&P's move Wednesday, heightened speculation that European officials are working on a larger multi-year fund for Greece, and a relatively smooth Italian bond auction, are helping to calm the foreign exchange market for the moment.
Sentiment towards the euro remains poor, but many seem increasingly reluctant to add to short positions, fearful of a short-term bounce on some news development that would offer a better selling opportunity. With Tokyo markets closed Thursday, the yen is also in a consolidative mode.
Some suggestion that U.K. Prime Minister Gordown Brown's gaffe may reduce the risk of a coalition government may be offering sterling support is probably more wishful thinking, especially ahead of Thursday's television debate.
Equity markets were mixed Thursday. The MSCI Asia-Pacific Index, excluding Japan, extended its losing streak to the third consecutive session with a 0.3% loss. The commodity and telecom sectors were the weakest. While many of the large markets lost ground, including China, Korea and Taiwan, many of the smaller markets, including Malaysia, Thailand and Indonesia, managed to post modest gains.
European bourses are mostly around 0.3% to 0.5% higher. All the sectors represented in the Dow Jones Stoxx 600 are higher. Telecom and consumer good sectors are leading the advance. Of note, the Athens market is posting around a 5% gain, with financials up nearly 8%. This illustrates the corrective forces at work Thursday.
This corrective tone is evident in the sovereign bond markets, where peripheral European bonds are firmer, with Greece and Portuguese bonds doing the best. Italy's bond auction was alright and in any event better received than the bill auction earlier in the week. Note that tomorrow Italy has a large 13 billion euro maturity and Spain makes a 1 billion euro coupon payment.
In the current environment, there is a risk that some of the funds flow out of the eurozone and potentially weigh on the euro itself.
