EUR USD (1.2130) Monday was a day of warnings for the eurozone and for eurozone investors. The first ‘red-light’ came from the market itself, namely the continued spike in Spanish sovereign yields beyond the level of 7.5 percent. To this was added the introduction of a new short-selling ban in Spain and in Italy. The move, although designed to protect banks, insurers and other sensitive firms in times of stress, has been shown in scientific studies to be of doubtful effectiveness. There is, nonetheless, a psychological effect from the bans which is to alert investors to the gravity of the situation. Consequently, bank stocks across Europe registered sharp falls. Finally, the rating agency Moody’s put several core eurozone countries – including Germany – on negative watch. Although this headline monopolises all the front pages this morning, it is probably the least damaging of the three warnings. Ratings are anyway a relative evaluation: once all countries are downgraded, none of them are. Despite the grim headlines throughout the session, the euro was able to end the day practically where it started. This does not mean the downside pressure is over; however, the brisk rise in implied volatility does suggest investors wasted no time in protecting themselves from further falls, which means a very sharp sell-off is less likely. The declines are more likely to be gradual, down to 1.2010 and then to 1.1860. To the upside, a break of 1.2295 is now all that would be required for a short-term stabilisation.
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Deutsche Bank