The Euro was trading heavily today as both Spanish and Italian sovereign debt forced it to lose the gains that it had made during the Asian market. Traders were particularly concerned about the rising bond yields of both countries which, have been exposed to the positive news of the weekend and the departure of Berlusconi, one again became bogged down in negative sentiment. Bond yields are a particular paranoia of currency speculators as they have become the traffic light for the inevitable bail-out, and, also for the heavy-sanctioning ‘Troika’. The particularly ineffective handling of the Greek crisis has seen many lose faith in the abilities of Europe’s financial elite to resolve post-bailout economies without simply spreading the infection.
Angela Merkel perhaps did not help the situation with her comments announcing that Europe was in its toughest hour since World War Two. It would certainly seem so for Spain and Italy, who are now at the mercy of financial lenders and speculators to provide them with the capital that they require to fund the debts accrued by their beleaguered economies. The self-fulfilling prophecy of bonds makes them perhaps one of the most destructive of all financial instruments. Having been designed as low a low yield security, they have now become a public reflection of the most sovereign of secrets-a nation’s bank balance.
Whilst the most reactionary and politically savvy move is for the blame to be placed on the countries leaders, as seen in both Greece and Italy, it would appear that government treasury problems have been manifesting over considerable amounts of time. The introduction of technocratic leaders will thus also take considerable amounts of time to realign the embedded problems and promote economic growth. The vicious circle for nations experiencing high bond yields is not only the inability to borrow or pay back at these high rates but the lack of resources to engage in domestic economic stimulation measures. Placed into the context of a regional crisis and the economic and political livelihoods of these countries are literally placed at the mercy of those with the power to maintain the credit flowing.
The USD, the favourite currency of the risk averse in times of trouble, bounced back today as its negative correlation with stock markets made it popular amongst investors. The fall in equities, prompted again by the bond yields of the two European heavyweights, stimulated a rush to the protection of the USD. Also accompanied by last weeks revised growth figures for the region, and the passing of a vote in Germany to allow countries to voluntarily exit the Euro, caused downward pressure on both the Euro and equities both sides of the Atlantic. The FTSE closed down nearly 0.5% whilst the German DAX declined 1.2%; this soured the mood over the weekend that the change in leadership would somehow reduce market anxiety. It seems that the bond markets are the fundamental power ruling over all classes of security, for the short-term at least.