Alarm bells ring in Italy

Market concern has heightened that Italy may be dragged into the Eurozone debt contagion, after Italy’s 10-year bond yield surged to more than 7% yesterday, a threshold that prompted Greece, Portugal and Ireland to seek bailouts. Traders will undoubtedly watch with keen interest the response to Italy’s one-year bill auction worth €5 billion scheduled later today, to gauge market appetite for Italian government debt. Another important event risk taking center stage today includes the crucial Bank of England’s rate setting meeting, although no surprise is expected from the central bank on both interest rate and asset purchase front. We anticipate Sterling to be volatile against the Euro today, with further direction to be determined from the outcome of the BoE meeting, and news flow from the Eurozone.

Pound Sterling – UK Markets

The Pound is trading marginally lower against the Euro and the US Dollar, this morning, ahead of the Bank of England’s monetary policy meeting scheduled later today. The central bank’s Monetary Policy Committee is expected to hold interest rates at a record low of 0.5%, while its asset purchase programme is expected to remain unchanged at £275 billion. Market concern about Britain’s housing market continue to persist, following a warning from Central London's largest landlords, Great Portland Estates, that commercial property capital values in London may fall, and major development projects may be cancelled. However, Sterling seems to be better placed against the Euro, amid mounting concerns over the sovereign debt situation in the Eurozone, and market speculation of a possible split up of the Eurozone.

US Dollar – US Markets

The US Dollar is volatile against the Euro and Sterling this morning. Yesterday, the US Dollar had strengthened against the Euro, as growing risk aversion over the sovereign debt contagion effect in the Eurozone, boosted demand for the US Dollar as a safe haven asset. Surging Italian bond yields, and a decline in Chinese exports in October, have highlighted the problems affecting the global economy, denting investor confidence. Economic indicators on tap today include initial & continuing jobless claims, trade balance and import price index. Investors also await the release of the Budget Statement for October. We expect the US Dollar to be volatile against the majors today, and expected to find further direction from the events unfolding in the Eurozone.

Euro – European Markets

The Euro is trading marginally higher against Sterling and the US Dollar, even as investors’ exercise caution, ahead of Italy’s €5 billion one-year bill auction scheduled later today. Italian 10 year bond yield soared above 7% yesterday, after clearing house, LCH Clearnet SA, demanded more collateral on the country's bonds. Meanwhile, France denied discussing the idea of a smaller Eurozone with Germany, potentially putting at rest the market speculation of the restructuring of the European Union. On the economic front, data indicated that German annual consumer price inflation has accelerated in October. Investors await European Central Bank’s monthly report for some cues to resolve the region’s debt crisis. We expect the Euro to take further direction against the major currencies from the outcome of the Italian bond auction slated for today.

Other Currencies – Highlights

The Kiwi Dollar is trading lower against its major counterparts, after data showed that New Zealand’s manufacturing activity contracted in October to the worst level since June 2009. Additionally, the consumer confidence index also declined in November. Market participants have turned risk averse, following steep decline in the Asian stock markets, and a weak start to the European equity markets. Additionally, demand for the Kiwi Dollar waned, amid mounting uncertainty over the Italian debt situation.