Unfortunately for investors, the bad news wasn’t just limited to Spain. Whispers the Italian region of Sicily may also be in trouble, and chatter the IMF is now refusing extra aid for Greece also unnerved investors. “Italian sovereign CDS spreads are now above 500bps, with Spain above 600bps – indicative of a market ascribing an increased probability of default.” he adds.
Against a backdrop of soaring risk aversion and commodity price weakness, investors flocked back to the relative ‘safe-haven’ of the USD and JPY. “We don’t think recent JPY movements could be construed as ‘disorderly’ and as such we doubt we’ll see intervention unless USD/JPY moves rapidly through 77.00.” Jones comments.
Looking ahead, whether the current backdrop of risk aversion and USD strength will be sustained may well depend on the relative strength of this week’s data.