The current week started with another unpleasant surprise for investors. The eurozone’s periphery keeps being feverish. Before the EU leaders decided on the Greek debt there emerged problems in Italy and Portugal (read the article “Credit rating of Portugal : troubling sign for investors and the whole EU?”). On July 11th Italy’s 10-year bond yield hit a new record high (5,46%). Investors keep being worried about the eurozone’s growing debt crisis while getting rid of some risky and unreliable Euro T-bonds.
Is it really the beginning of an EU-wide debt crisis?
The signs of a major crisis. It is not only about the Italian debt. We can see other EU states having the same problems. It proves that the crisis is systematic.
Ireland. On the same day Ireland’s 10-year T-bond yield also grew up to 13,5%, which is a record high as well.
Spain . The Spanish T-bonds also hit a new record. On July 11th the yield reached 5,8% - the highest value since 1997.
Portugal . For the first time since 1995 the 10-year T-bond yield reached 13.2%.
Greece. This is an obvious frontrunner among the debt-ridden EU countries. The current T-bond yield is 17,2%.
The overall tendency. The continuous and uninterrupted growth of the mentioned T-bond yields has been going on for the last 12 weeks! 3 weeks ago the growth accelerated.
Why does the tension in the EU bond market keep escalating?
· The old reasons. Over the last 16 months the continuous growth of the eurozone’s T-bond yields has been seen mainly because investors have been worried that Greece may default on its debt. The Greek issue will definitely cause further tensions in the markets because Greece’s sovereign debt is connected with considerable risks.
· The new reasons. The markets were shocked by the news that the closest Euro Group’s meeting will be devoted to the crisis phenomena in the Italian economy, which has been considered the EU’s 3rd economy until recently.
There can be several reasons for that:
- The collapse of the stocks of Italy’s leading banks, which made the main Milan stock exchange index decline as well.
- The Italian debt is one of the world’s biggest - 120% of the national GDP.
- Italy’s budget deficit is considerable. It may cause a decline in the coutry’s credit rating.
- Silvio Berlusconi’s government keeps disagreeing on austerity measures.
How did the markets react to the new cycle of the EU debt crisis?
1. On Monday European stock indexes lost 1-2% of their value. S&P500 futures lost more than 1%.
2. EUSUD declined by 0,71% down to 1,4155.
What should investors pay attention to?
· The crisis virus. The amount of the infected countries is growing. Eventually it well may turn into a huge problem for the entire eurozone.
· Investments in the eurozone are risky. Brussels does its best to make a new financial “safety cushion”, which will temporarily help the sick economies to pretend that everything is fine with them. Of course it is mainly done to calm down investors. The EU’s stabilization fund is said to reach 1.5 trillion euro but there is a threat that Brussels’ model just won’t work.
· Numerous EU economies are now bulging at the seams. Obviously, it is much easier to save Greece, Portugal and Ireland (as they produce only 6% of the eurozone’s GDP) than Italy and Spain (28% of the eurozone’s GDP). The fund just may fail to withstand the load, even if supported by the IMF.
It is obvious that the abovementioned info cannot support the common Euro currency. That is why EURUSD will probably continue declining.
According to the experts of , EURUSD will fall below 1.4200, thus confirming the bears’ dominance. At the moment the exchange rate is around 1.3850/60 and keeps trying to break below the zone. Numerous indicators confirm that the bears are determined to drop the price down to 1.3770/80 – 38.2. However there is still a chance of the price rallying up to 1.4940. On the other hand, the level that is being tested right now can prevent EURUSD from falling further down in mid-term perspective.
It is crucial for the bulls to make the price reach at least 1.4120 in order to be able to develop the bullish scenario.
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Market Leader and would be very grateful to you for participating in a survey. Please, visit the Academy’s forum and answer the question given below:
Will the eurozone debt crisis worsen?
· Yes, it will
· No, it won’t
