More Deficit, Debt and Default; More Risk Aversion

The usual suspects sparked worries on Monday: Europe's sovereign crisis and the US debt ceiling. The euro fell early in the day but rebounded late. Japan returns from holiday and the RBA minutes will be released in tonight's Asian session.

European sovereign spreads widened early, pressuring the euro to a low of 1.4014. Italian 10-years climbed above 6% and Greek 10s hit a record above 18%. TECHNICALS AND RUMORS SPARKED THE EURO REBOUND. EUR/USD bounced from the lows and then formed a double bottom at the days lows, sparking a rally to 1.4120, down only 30 pips on the day. Talk of Chinese buying and a rumour that leaders will propose expanding bailout funds and/or powers at Thursdays EU emergency meeting also fuelled the rebound.

CHF and CAD were the days laggards while JPY and NZD led. Gold rallied for the eighth consecutive session to a record $1608. The S&P 500 fell 0.8% to 1305. Ashrafs short recommendation in the S&P 500 hit its target and several other trades are ongoing and in the money.

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US lawmakers didnt make any visible progress on debt limit talks, even with the ratings agency vultures circling. We see a growing chance of a punishing round of risk aversion and dollar volatility IF THERE ARE STILL SIGNS OF A STALEMATE LATE ON WEDNESDAY. On Monday, Obama said he will veto any bill featuring a balanced budget requirement such as the one House Republicans will vote on Tuesday.

Corporate news is unlikely to improve the mood in the day ahead. Cisco announced 11,500 layoffs and Borders (the second-largest book store in the US) could not find a bidder for the chain and announced it will liquidate. Good news came from IBM, which handily beat earnings expectations.

Asia-Pacific Preview

The minutes of the July 5 RBA meeting will be released at 0130 GMT in the only economic event of the session. Volatility could come from Japan, as markets re-open after Mondays holiday. At the July 5 meeting, the RBA said its mildly restrictive stance on monetary policy remained appropriate. The Australian dollar fell on the statement as Stevens said a slower pace of employment growth was likely to continue. Talk that the RBA could cut rates later this year continues to circulate and weigh on AUD.