The debt crisis in the euro zone is still very much leaving its mark across the financial markets, and risk aversion was once again the controlling factor during the trading session on Tuesday, which saw considerable declines in the leading European equity indices.
Consumer confidence in the US offered a positive surprise as it increased from 57.7 to no less than 63.3 in May; expectations had pointed to 58.8. The encouraging macroeconomic indicators did not, however, initially affect the markets, which are still characterised by much nervousness.
At the short end of the yield curve there are still continued indications of tension in the market despite the recent initiatives from governments as well as central banks intended to put a damper on the rising nervousness. The 3-month USD Libor rate is still rising, and the Libor-OIS spread (can be seen as an indication of the risk premium in the market) is still widening. Moreover, the interest rates on the front eurodollar contract (futures contract on 3M USD Libor), which indicates that the market fears further increases in the 3M USD Libor rate over the coming weeks.
In the FX markets the euro has resumed its decline against USD, JPY and CHF, while both EUR/NOK and EUR/SEK have in recent weeks seen support due to the rising risk aversion.
Today will not see any major economic indicators, and therefore the general sentiment in the financial markets will presumably determine the direction in the FX markets.
Despite the sour sentiment yesterday in Europe, US equities managed (after moving up and down quite a bit) to end the day unchanged, and overnight in Asia the leading equity indices managed to maintain a rather positive development. All other things being equal, this indicates that sentiment in Europe will be slightly more positive as of the early morning than was the case at closing yesterday. There is, however, still some nervousness, and therefore we may still see relatively large fluctuations.
