Eyes Still on Italy Ahead of a New Bond Auction

Markets are resuming the sharp losses seen yesterday which were triggered by renewed fears over Europe’s banking system and the declining home prices in theUS. Markets will be closely watchingItaly’s 8.5 billion euros of debt auction due in 2014 and 2022.

Caution is persisting today ahead ofItaly’s bond sale since the 11.5 billion euros bond auction yesterday failed to lower the 10-year yields which were little changed at 7%. Meanwhile the ECB said yesterday “its balance sheet soared to a record 2.73 trillion euros after lending to banks last week”.

This confirms that the situation in the euro-zone is still highly unstable. Those uncertainties combined with low volumes create high volatility when concerns widen. Thereby commodities and high yielding currencies fell sharply, while the yen rose to a 10-year high against the euro, pressuring exports.

The vulnerability of Asia’s economy to cooling demand which was hurt by the European crisis believed to slow the global economy even more, brought losses in Asia today as risk aversion was triggered, where Nikkei 225 fell 0.29% while Hand Seng fell 0.65%.

In Europe however, shares opened higher with DAX gaining 0.27% and CAC 40 gaining 0.32% ahead ofItaly’s bond auction which will set the tone for the euro and will be considered as a test of the European banks’ appetite, yet caution will persist asEurope’s banking system continued to be unstable.

Therefore demand on safe haven in the currency markets continues today, with the USD trading with an upside bias around the 80.50 level, while the yen was stringer trading around the 77.75 level against the dollar. The euro is weaker trading around the 1.2920 level while the pound is around the 1.5435 level.

The focus will also turn to the US as well, as it release its pending home sales and jobless claims, both expected to have weaker outcomes, which could trigger more risk aversion. The AUD is almost unchanged around the 1.0090 level, while the CHF is trading around today’s opening at 0.9425.

The stringer USD and the weaker global economic outlook which will worsen earnings outlook for many companies, brought losses within the commodities as well, where gold is extending yesterday’s losses trading around the $1552.35 level while oil is trading around the $99.45 level.