Risk Appetite Remains Muted

Risk appetite among traders suffered yesterday amid persistent concerns surrounding Spain as evident from rising bond yields in the region. The ECB’s rejection of the plan for refinancing Bankia, coupled with a credit rating downgrade of Spain, has worsened matters. Reports suggesting that China has no plan to introduce large scale stimulus also soured market mood. Traders are now likely to focus on Eurozone confidence indices, Italian bond auctions and US housing data due later today for further hints on the state of the global economy. In the UK, data just out revealed that M4 money supply declined for April.

Pound Sterling – UK Markets

Heightened speculation over additional easing following BoE policymaker, Ben Broadbent’s comments and Spanish banking sector woes enticed traders to move towards safe haven currencies and weighed on the Pound against the US Dollar yesterday. Sterling has extended its losses against the US Dollar in today’s trading session and is trading below the 1.56 level. However, the Pound is holding relatively unchanged against the Euro. Meanwhile, the outlook for the British retail sector turned positive after the CBI in its survey yesterday indicated that the sector is poised to record the strongest growth since April last year. Fears over UK’s retail sector had earlier escalated after data revealed an unexpected fall in retail sales last month. Data just out revealed that mortgage approvals climbed for April, while M4 money supply declined for the same period. In absence of major macro indicators today, market participants keenly await crucial economic data scheduled for release later this week. The GfK consumer confidence survey and manufacturing PMI for May are likely to provide further direction to Sterling against the majors.

US Dollar – US Markets

Persistent fears over the health of the Spanish financial system drove the greenback higher against the Euro and Sterling in yesterday’s trading session. The 10 year Spanish government bond yield soared to a six month high as markets feared that more spending might be required to support these ailing banks. Additionally, hopes of additional stimulus for the Chinese economy were dampened after reports indicated that China has no plans for stimulus measures this year on the scale seen during the previous financial crisis. The US Dollar has continued to gain against the majors this morning amid consistent demand for safe haven assets. Turning focus to the economic landscape, an unexpected fall in US consumer confidence and a dismal manufacturing reading from the Dallas region have triggered concerns that the US economy might no longer be insulated from weakness emerging from the Eurozone. On the flipside, the S&P/Case-Shiller home price index, although weak, depicted a second straight monthly rise. Against this backdrop today’s pending home sales report for April is likely to garner increased market attention.

Euro – European Markets

The Euro breached key resistance levelsa against the US Dollar in yesterday’s trading session, as Spain’s 10 year bond yield climbed to the highest level in six months. Adding to these woes, Egan-Jones lowered its credit rating on Spain to “B” from “BB-”. Moreover, signs emerged that China might take a cautious stance on providing further stimulus. In a noteworthy development the Governor of th Bank of Spain stepped down a month earlier than planned amid criticism over the nationalisation of Bankia. The downbeat mood surrounding Spain has continued this morning and is weighing on the Euro against the US Dollar. Hopes pf receiving aid for Bankia from the ECB were dashed following a report which revealed that the central bank plans to oppose any attempt to fund recapitalisation of the beleaguered lender via the central bank's lending facilities. In today’s trading session, the business climate index in the Eurozone is likely to be closely watched amid the prevailing recessionary environment. The European debt worries are expected to maintain Italian borrowing costs at higher levels at a bond auction scheduled later today.

Other Currencies – Highlights

Mounting concerns over the fate of the Spanish banking system sapped out demand from high yield currencies and led the Kiwi Dollar lower against the US Dollar. Additionally, fading hopes of further stimulus in China and weak Asian and European equity markets today further dented risk appetite among traders. Underpinning losses in the Kiwi Dollar, the New Zealand Institute of Economic Research indicated that the Reserve Bank of New Zealand is likely to keep its benchmark interest rate on hold until early 2014 and may lower the interest rates if the European debt crisis intensifies. Additionally, data indicating a sharp decline in New Zealand’s building permits for April weighed on the currency. With no other major domestic economic releases today, the Kiwi Dollar is likely to respond to the prevalent risk sentiment in the market. Meanwhile, tomorrow’s activity outlook index and business confidence index in New Zealand are likely to be closely tracked.