European Dark Clouds

The EUR stumbled out of the gate early on Tuesday and it continued to fall throughout. Sovereign debt in Europe continued to produce troubling yields among many nations and alarm bells must be going off in institutional investment offices globally now. As the EUR sank to new lows against the USD, the GBP and AUD followed in a EUR centric mode and became weaker too. While GDP numbers from Germany produced its targeted estimate, the numbers certainly do not point to anything more than lackluster growth in Europe’s main engine. The problems for Europe also came from the political front as news from Greece points to internal debate still within its government regarding signing off on austerity measures. Risk adverse trading has taken the USD to stronger values and the Greenback may continue to find takers even as the EUR approaches low water marks and range trading ensues.

The U.S. released slightly better than expected Retail Sales numbers and this helped Wall Street produce some gains. But trading on the major indexes appeared cautious and the gains were not significant considering the losses from the previous day. Inflation data will come from Europe and the United States today, but the crux of attention will certainly remain on the financial crisis in the E.U. which is beginning to show signs of a rather discouraging magnitude. As yields in Italian bonds suffer, so have the yields in Spanish and French notes. While Greece may be considered a smaller domino in the scheme of European nations economically, there is nothing small about the debt levels of Italy and Spain. And with France now beginning to come under fire, worries among politicians and officials in the E.U. will be no little matter. Equity markets in Europe have also continued to take a pounding. As investors seek clarity from officials what they have gotten instead is wide variety of opinions on how financial engineering should be designed and the notion that solving this crisis is going to take a significant amount of time.

The EUR is justifiably at relative lows against the USD. But to be fair, economic conditions in the U.S. remain cloudy also. If Europe were to lurch into a full blown recession it is likely that this could have an unhealthy impact on the American economy too. The States had their own problems before Europe’s debt situation, namely joblessness, a housing depression, and uninspiring consumer confidence have been burdens. The U.S. also has a high debt burden and problems among municipal bonds in individual States has been known for a while. Added to this equation is the fact that the Federal Reserve is perceived to be in a rather dovish monetary policy mode, one in which it could take further quantitative easing actions if called upon. Thus the question for investors of the EUR/USD pair is where will ‘fair value actually be found.

The JPY finds itself in a consolidated mode and has run into a rather tight range as safe haven seekers may find themselves being gun shy when it comes to buying the JPY at these values because of the ‘known’ belief that the BoJ in fact wants a weaker currency and may be ready to intervene. Gold as of this morning is around 1766.00 USD and has traded lower as the Greenback continues to muster gains.

Inflation data and reports will come from continental Europe, the U.K., and the U.S. today, but market sentiment will continue to be driven by the shadows Europe is casting.