This is a red flag day, and we are all euro (EUR) traders here and 1.18 seem far away compared to 1.13 again given the present situation, writes Bob Savage Tuesday.
When safe-havens like the Japanese yen (JPY), Swiss franc (CHF), gold and U.S. bonds move, red flags over risk are raised.
This is a red-flag day and one that doesn’t seem ready to do the usual roll-over to “buy-the-dip” that we have all become trained to expect. The difference is the increase in volatility in fixed income and forex overwhelms equities – crisis pricing begets a different response – as fear beats greed and hopes are dashed.
The hope over the weekend was that Italy would fix its political mess, start a new populist government and follow the Greek model to comply to EU rules. Instead, we get a threat of early elections, the 5-Star Movement majority calling for peaceful protests and a blow up of Italian debt, which hits Spain, that suffers its own crisis with PM Rajoy facing a Friday vote of no confidence and drives the euro to new lows and leaves the emerging markets world spinning lower.
Overnight, the good news that the U.S. deferred new North Korea sanctions didn’t matter to offset the Italy fears. Even a North Korean envoy flying to the U.S. didn’t move Asia markets.
The oil market is also holding the Friday losses – WTI at 6-week lows – as Russia and Saudi appear ready to open their production taps and to fight with OPEC for a production increase overall to offset Iran sanctions and Venezuela chaos.
The Turkish central bank Monday promised to simplify its rate system suggesting its back to independence from government, which helped the Turkish lira (TRY) but today that evaporates with Italy. The only thing that seems to matter now is the contagion measurement and how bonds, forex and stocks trade together in Europe moving everyone and everything else.
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