Risk aversion. Every morning I sit at the keyboard and that phrase seems to just type itself. Prospects for a long, deep global recession build by the day, undermining animal spirits which limit appetite for equities, comodities and all manner of “risky” assets.
Interest rate differentials which favored the euro late in 2008 are melting as the market prices in continued cuts from the ECB in the months ahead. Benchmark 10-year German bunds outyielded US Treasuries by over 80 bp at the end of 2008 but that spread has closed to just 63 bp today. Meanwhile spreads between Germany and less-creditworthy EU members like Spain, Ireland and Italy have widened to record levels.
While the world frets over US debt issuance, S&P (admittedly, a tainted source after CDO debacle) has affirmed the US’s AAA credit rating with a stable outlook.
EUR/USD is consolidating losses after breaking 1.3241, the 68.1% retracement of the 1.2330/1.4720 rally earlier today. We trade now at 1.3285 amid few signs that global gloom will lift anytime soon.
