Eurozone Crisis Nearing the Panic Stage

Its growing more difficult to harbor any optimism about Europe after the euro plunged again Wednesday falling below 1.3350 The carry trade was battered while USD and JPY outperformed. Japan returns from holiday but hopes in Europe will be for a quiet end to the week as Americans celebrate Thanksgiving. Latest Premium trades include EURUSD (2), Gold (2), oil (2), silver (2).

Until today, Germany was the rock that the rest of the eurozone could rely on but a failed 10-year bund auction has crushed the illusion of infallibility. The sale failed to attract bids for 35% of the bonds offered, pushing benchmark yields 15 basis points higher. But even with German yields rising, spreads continued to widen, especially in Belgium on speculation the Dexia bailout could flop.

A late session report that Germany is no longer categorically ruling out eurobonds stabilized sentiment but the euro bounce was minimal.

Aside from domestic bonds and financial shares, the eurozone crisis hasnt destroyed risk appetite in the way the US crisis did but that can no longer be ruled out. If the crisis spreads from the periphery to the core it will go global. French yields are nearing 4% and Fitch warned that a further shock will jeopardize its AAA-rating.

It should be no surprise for anyone to wake up some time in the next several weeks and see the euro down 5 cents, stocks down 5% and oil down $15. In a crisis, there are panics and liquidation and the odds of such a day are now nearing 50%.

At the same time, the economic picture in the US remains cloudy. Factoring in revisions, the October durable goods orders report was softer than expected. Excluding air and defense it was the weakest in six months. The PCE report was mixed. Consumption rose just 0.1% (vs +0.3% exp) but income increased 0.4% (vs +0.3% exp).

The S&P 500 fell 2.2% to 1161 in the sixth consecutive day of selling.

In early Asia-Pac trading New Zealand posted a NZ$282m trade deficit compared to the $454m expected, leading to a small bump in NZD. There is no other data scheduled until Germany GDP in early European trade.

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