Euro Slaughtered on Greek Uncertainty

A wave of risk aversion smashed over markets Wednesday, driving the euro more than 250 pips lower and hammering stocks. Political disarray in Greece and continuing weak economic signals triggered the move. New Zealand's business PMI is the highlight of the Asia-Pacific session.

Intensifying protests in Greece emboldened protestors who attempted to storm Parliament. At the same time, opposition leaders are attempting to force out PM Papandreou. A cabinet reshuffling has been annouced and some reports suggest Papandreou has offered to step down as long as new leaders respect the terms of the bailout package. The uncertainty is weighing on negotiations with EU leaders and market participants are now questioning whether the bailout (which was assumed to be completed two weeks ago) will go forward.

Other factors that weighed on sentiment included: 1) A -7.8 reading in the Empire Fed compared to the +12 expected. 2) US industrial production expanded 0.1% vs the +0.2% expected. Metrics on rail and truck transportation also flashed further contractionary signals. 3) US core CPI rose 0.3% vs 0.2% expected. Higher inflation gives the Fed less flexibility to stimulate the economy. 4) Irish leaders said they want senior bondholders to take a haircut on the bonds of bailed out banks.

The USD was the chief beneficiary of the risk aversion and the DXY rose the most in 8 months. The S&P500 fell 1.7% to 1265 and oil closed below $95. Gold and silver were among the small number of commodities that made gains. Cable was the second-worst performer due to European proximity and dovish comments from King. Although he asserted that rates will eventually need to rise, he said low M4 is a negative for inflation and that lending spreads must tighten before rates rise.

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