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Wednesday Outlook: Euro Crisis Bubbles Up Again



Euro bills and coins in cash register tray
AP
Euro bills and coins in cash register tray
"To me there's a disconnect here in terms of what certain assets are telling us in Europe, when contrasted with the apparently unrelenting strength of the euro." -Senior FX Strategist Standard Chartered, Michael Moran

On Tuesday, the U.S. Food and Drug Administration banned food imports from the area of Japan affected by the leaking Fukushima Dai-ichi nuclear facility, and Japanese press reports said the Japanese government estimates quake related damage at $185-$308 billion.

Euro Zoned

Ireland joined Portugal in the spotlight Tuesday as rumors, later knocked down, circulated that it would not meet its debt payments.

The dollar was just slightly weaker against the Euro (1.4199) and slightly stronger against the Yen (80.9061).

"To me there's a disconnect here in terms of what certain assets are telling us in Europe, when contrasted with the apparently unrelenting strength of the euro," said Michael Moran, Standard Chartered senior foreign exchange strategist. "There is a conflict. I think at some point there will be a convergence and ultimately I think the euro will be the casualty, but this could take multiple months to really play out."

Moran said the November high of 1.4282 is in play as the next level for the euro currency. "That is really the level people are gunning for now," he said. "...On the one hand the debt perception of the European periphery has arguably worsened over the last 12 to 18 months, yet the euro is strengthening."

Moran said failure of the Portuguese government would be a "fresh negative" for the euro, and the rumors about Ireland, which were propelled across world markets by Twitter, is a reminder that there remains structural issues in the euro zone. He added that the stronger message might be that this is a period of dollar weakening, rather than euro strengthening.

"There's two central pillars of support. One is Germany and its outperformance, and the other is the insistance from (European Central Bank President Jean Claude) Trichet that tightening is the best course of action," he said.

"If one take a macro view in the next six months, the euro does look a little too strong in that sense. But if you're a trader, especially over the last two or three weeks, you have to be cognizant that the momentum really has been with the euro bulls, and it's been very expensive trying to fade these moves higher in the euro. But I think there is some inconsistencies and conflict, which suggest sentiment might still have a glass jaw, but it's very difficult to really go against the under lying momentum now," he said.

Oil Drill

Oil was a big gainer on the day, with the May contract for WTI Crude rising 1.8 percent to settle at $104.97 per barrel, as traders watched the conflict in Libya and tensions in Yemen and Syria. Yemeni President Ali Abdullah Saleh refused to give in to opponents who demanded he quit, as he continued to lose support from one-time backers.

A rebel militiaman stands guard at a Libyan oil refinery in rebel-held territory on February 27, 2011 in Al Brega, Libya. The opposition leadership has stressed that oil faciities in areas under its control are safe, despite the conflict roiling the country.
A rebel militiaman stands guard at a Libyan oil refinery in rebel-held territory on February 27, 2011 in Al Brega, Libya. The opposition leadership has stressed that oil faciities in areas under its control are safe, despite the conflict roiling the country.

Traders are watching for EIA supply data, following the API's report that showed a 970,000 build in U.S. crude stocks, well below the 1.6 million barrel increase expected by analysts.

"It's a very nervous market.. If the wrong thing happens. it could take out the highs we knew in 2008 in a blink," said Ray Carbone, president of Paramount Options.

While oil rose in reaction to Middle East events, Treasurys slid, with the 10-year Yield rising to 3.334. Gone was the flight-to-safety bid of last week, when markets reacted to fears that Japan's nuclear crisis would continue to worsen.

"It's right now immune to any of the external forces. You've got the market trading momentarily on the Fed purchases. This week we had an onslaught of corporate pricings. So in the morning, you get the hedging of the product, and in the afternoon you get the pricings," said Jefferies Treasury strategist John Spinello.

There was $13.65 billion in investment grade corporates issued Tuesday, including most of a $7 billion 6-part trade for Sanofi-Aventis' acquisition of Genzyme. Dupont also came to market with $4 billion for its acquisition of Danisco, according to Thomson Reuters IFR. So far this week, $19.3 billion has priced, compared to just $6.85 billion last week as issuers held off a the Japanese and Middle East events dominated market attention.

Spinello said the overnight Tuesday was affected by strong U.K. inflation data, which drove Sterling higher against the dollar. "The question is who goes first," in terms of tightening monetary policy, and the market could become concerned that the Fed is lagging in tightening, he said.

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