So far, taking a check at the state of affairs, I still think we can turn back around. Look at the sheer price run and know that we are only now approaching what could be called “top of the range”. I cannot become concerned by bond prices, as they remain at all-time lows and, thanks to central banks, are not allowed to sell off significantly anyway. Why shouldn’t bonds go up? (I know, that logic cannot hold, but for the moment it’s a sticky sort of rule of thumb). Bonds selling off hard are a cause for concern. Bonds being bought are a given.
But I am most assuredly fixed on the yields of France, Italy, Spain and Greece. Yesterday, Italy managed to eradicate three months of goodwill for themselves and their neighbors in what amounts to sheer idiocy. Italians obviously don’t understand the concept of a Catch 22 – in this case, they can pick between austerity or being left for dead (a compelling choice, I know).
Italian 10 years are now approaching the 5% level; effectively lifting ~1% in a matter of two days. While that is certainly a warning sign, I wish to see if that price can hold.
Also, remember that France is intricately tied up in all of this. If we were getting ready for a true panic, I would expect France yields to be getting murdered here.
I’m also not sure what I think of the EURUSD. It’s sitting at around 1.3, which has really been a sort of center for the currency swap during the last 2-3 years. Any time there’s trouble or rebound, it seems like we make the decision around 1.3.
If we were ready to crater, part of me thinks we’d be seeing a bigger initial euro rally, as European financials stock up on emergency stores of euros. Yet, we certainly have had a large resurgence of the EURUSD off the lows, and perhaps that was driven by European financials as much as anything, gathering that very same I have just described.
Also, even though I suspect demand for currency would create a spike before any major selloff, ultimately the euro is destined to go lower, either through devaluation necessary to hold the EU together, or its abstract worthlessness when the EU begins to come apart.
In any major event I expect the euro to move sharply and with conviction. The sashaying it’s undergoing at the moment makes me think this selloff will pass with time.
Until I’m more confident of that though, I’ll be keeping a wary eye on bonds and currencies.