| CATEGORY: FX |
Wed 16 May 2012
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Glossary
Basis point: One-hundredth of a percentage point
Risk premium: Difference between the yield on a nation's benchmark 10-year bond and the yield on the German equivalent bond
LONDON (SHARECAST) - Wednesday morning saw the European session kick off with the main equity benchmark indices down by a percentage point on average, on worries over the Greek political situation.
Greece’s political problems with new elections in the pipeline and speculation that it will leave the euro are hurting European assets.
As a result of the above turmoil, the German Bund is increasingly attractive in relative terms and now has a yield of 1.45%. Meanwhile, Spain’s risk premium spiked above 500 basis points with a 10-year yield is above 6.5%. Spain is approaching what is considered to be unsustainable levels, raising the risk of needing intervention from the “troika.”
It is interesting to note that the European Central Bank (ECB) has not intervened verbally to halt the declining markets. One possible reason is that it wants to allow free markets to make their own adjustments and for euro depreciation to boost the Eurozone’s foreign trade.
Shortly after becoming the new French president yesterday, François Hollande met with Angela Merkel. Both leaders expressed their desire for Greece to remain in the Eurozone. Those words may no longer be very reassuring as Greece faces new elections that may reveal that most Greeks support a rejection of austerity measures.
In the foreign exchange market, there is broad-based strength by the dollar and weakness for the euro. The euro/dollar falls below $1.2700 and sets a new four-month low at $1.26815. The euro/yen moves to 102.00 and the euro/sterling pound remains comfortably below €0.8000 after Monday’s breakout. The euro/Swiss franc remains near 1.2000.
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