Overview: Risk assets recovering today after yesterday’s sharp drops in Asia and Europe. News of EU and IMF teams arriving in Dublin Thursday eased concerns, allowing US stocks to hold flat despite poor data and Asian and EU markets to rally thus far today on hopes for a solution to Ireland’s crisis. Note: the situation is volatile and markets are largely moving with latest news on a solution. Much depends on how flexible each side can be, however flexibility cannot be assumed, as leaders on both sides fear political ramifications IF seen as too weak in defending taxpayer interests. That could lead to a cycle of hope and disappointments as each side attempts to negotiate hard.
Key Factors Determining The Outcome Of Ireland Crisis And Thus How The EURUSD And Other Risk Pairs Will Move
All want a resolution, the question is a what cost.
Nations offering rescue (EU, US via IMF, UK) know they will be hurt badly if the situation remains unresolved. While Ireland has enough cash to last into next year, the lingering uncertainty is driving PIIGS and even core EU nation bond prices higher. France now pays more on some bonds than does Chile.
Ireland knows this and thus has some bargaining power, but must be careful not to alienate those whom it WILL ultimately need. It will try to avoid a government bailout in order to avoid EU control of its spending, and possible loss of its exceptionally low corporate tax rate.
EU/IMF officials cannot be seen as too lenient, both for their own electorates and for avoiding setting precedents for other bailouts. Banks from the UK and Germany have the most overall exposure to Irish banks and thus are under the most pressure to prevent them from defaulting.
Ireland will need aid no later than mid-2011 or will default. The question is how much is each side willing to let fear rise and risk a market collapse before making painful concessions.
STOCKS: US Down- MIXED, LITTLE CHANGED UP OR DOWN as they are pressured by same bearish news that hit Asia and EU yesterday: EU debt worries, China rate hikes
US Bonds: Down- Benchmark 10 year note down, yield up to 2.902% as stocks stabilize, inflation concerns from QE2
Asia Stock Outlook: Up – HIGHER on easing EU tensions as EU IMF teams arrive in Dublin, UK offers aid too, bargain hunting
European Stock Outlook: Up – Up as EU debt worries ease on news of coming bailout
Affects on Commodities and Forex: Commodities and risk fx following stocks higher as expected Risk sentiment combined with EU optimism means strongest fx over the past 24 hours are: AUD NZD EUR in that order, weakest: USD JPY GBP
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