Banking Worries Return, EUR Closes Below 1.35

A late warning from Fitch about vulnerabilities in the financial sector due to the European crisis hit risk sentiment hard. USD and JPY were the best performers while AUD, NZD and EUR lagged. Japanese machine tool orders are the lone indicator of note in Asia. 7 of our trades hit all targets (2 EURUSD, 1 EURJPY, 2 GBPUSD, 2 oil), 5 in progress (2 USDJPY, 1 gold, 1 EURGBP, 1 silver).

A modest negative tone percolated in markets for most of US trading as positive US data competed widening European spreads. The bears took over late after Fitch said further contagion from European banks poses a serious risk to US financials. At the same time, the WSJ reported that European banks are hitting a 2008-style funding crunch.

The S&P 500 fell 1.7% to 1237. EUR/USD closed below 1.35 for the first time since Oct 6. USD/CAD hit the highest since Oct 11 despite a rise in WTI crude to the highest since May.

US industrial production rose 0.7% in October compared to the 0.4% expected. US CPI, at 3.5% y/y came in lower than the 3.6% expected, boosting hopes for further QE.

Yesterday I wrote about the potential for stocks and the euro to decouple for a short period and that theory remained sound in early US trading but as sentiment worsened the buoyancy in equities quickly deflated. In spite of that, this trade may still have potential on days where overall sentiment is slightly more constructive.

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Asia-Pacific Preview

Early in the session, New Zealand reported that output producer prices climbed 0.2% in Q3 compared to 1.4% in Q2. The calendar is light for the remained of the session with the exception of Japanese machine tool orders at 0600 GMT. The previous reading was a 20.1% y/y rise.