The US dollar was flat in Asia, but has rallied in Europe. The inability of the euro to establish a foothold above $1.23 was a sign of encouragement to the bears. Rumors of an Austrian downgrade and Merkel's comment expressing doubts about the European project have seen the euro drop more than half a cent in late morning turn-over in London. The slide in of the major foreign currencies appears to have exhausted itself and as North American dealers return, look for the dollar's gains to be initially pared.
The debt market does not seem to reflect much concern about Austria, despite the rumors or euro price action. Austria's 10-year yield is up 1 bp at pixel time, at 1.86%. The 2-year yield is up 4 bp but at a 3 bp annual yield, hardly evidence of anxiety. The five-year credit default swap is about 4 bp lower at 135.7 (below France, for example, quoted near 162).
With tensions running high, capital preservation remains key and that explains why German was able to against sell 2-year at negative yields (-6 bp), the first time a conventional auction has produced a negative yield. Note too that the bid-to-cover of 2 was higher than the last auction in late June). Peripheral yields are mostly higher.
Despite first close to US stock indices yesterday, Asia was lower, with the MSCI Asia-Pacific index off nearly 0.5%. Expectations for additional stimulus may have helped steady the Chinese stocks, but other growth sensitive markets, like Taiwan and South Korea lost over 1%. European bourses are mixed, but the Dow Jones Stoxx 600 is up about 0.25%, with utilities and industrials under-performing,. Spanish and Italian markets are lower and financials are an important drag.
