Risk Assets Rise Despite Persistent Euro Region Anxiety

Despite strength across the risk spectrum overnight, concerns from the euro region continued to bubble away with Spain remaining front row and centre. With still many questions of Spain’s bailout terms left unanswered, the post-bailout rally has been marred by anxiety over the potential contagion effects for other debt ridden nations with Italy the next in the firing line. Although the bailout will be engineered to rescue ailing Spanish banks, the intrinsic link between banks and the sovereign itself remains of primary concern with fears of an imminent spill-over.

Spanish borrowing costs continuing to rise overnight night with yields forging new euro-era highs of 6.83 percent. A day after downgrading two of Spain’s largest banks Santander and BBVA, ratings agency Fitch followed through with a further downgrade of 18 Spanish banks overnight citing loan exposures to construction and real-estate markets.

The constant negativity across the Atlantic failed to cap strength across U.S equity markets with the Dow and S&P rising 1.31 and 1.17 percent respectively. Currencies resembled similar positivity with the high-beta kiwi and aussie dollars both rallying in unison. The euro saw moderate upside but stopped short of selling activity around the 1.2525 level.

The key inflection point for risk overnight came from Fed Chicago President Charles Evens who threw his support behind further initiatives to support US jobs, including further asset purchases in the form of both operation twist and quantitative easing. Still, with a treasure-trove of hurdles in the near-term including Greek elections on June 17, any strength mustered markets remains tentative at best. Local economic data today includes the Westpac Consumer confidence index due for release at 11.30am. Also in focus today will be a speech by RBA Governor Glenn Stevens to the Prime Minister’s Economic Forum in Brisbane.