Another week passes and the European debt crisis still remains unsolved. An intensification of the situation was seen this week as bond vigilantes set their sights on Italy as Italian 15-year bonds climbed to 5.9%, a level where some fixed income analysts believe the Italian debt burden would become unstable. As Europe fails to address the situation with a sense of urgency, market participants will not likely bury their heads in the sand.
The European elite are back at the drawing board attempting to craft a solution to the Greek debt crisis that will avoid a credit event, something the ECB has been adamant about. But Germany is in no such hurry to settle given the German and Dutch insistence on the bondholders taking a haircut. Germany appears willing to delay the issue and sees no need to meet until a feasible plan has been organized. At this time Greece looks to be fully funded due to additional EU/IMF funding but as the crisis carries on the possibility that additional nations’ bonds will come under pressure increases, much in the way Italy has this week.
Moving to the other side of the pond Obama put the ball in the corner of the Republicans when he walked out of the last debt ceiling negotiations and S&P has officially put the US on a rating watch as the August 2nd deadline creeps nearer. However, the market did not send the USD lower in response to the news. Yields in the US 10-year yield continue to trade below 3%, showing market expectations are for a shoe string deal to be hatched before the deadline. Rather FX participants have chosen to focus on the possibility of QE3, (see Wednesday’s price action) or a lack there of (see Thursday’s price action). Despite today’s headline inflation number which contracted by -0.2%, core CPI rose actually rose by, 0.3%, and should put the issue of QE3 to bed barring any subsequent market shock or dramatic downturn in US growth or unemployment numbers.
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