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  • Dutch budget wrangling hurts risk sentiment
  • Growth concerns hurt euro sentiment
  • Is another summer malaise upon us?
  • Market moves

If you looked at the headlines from the weekend you may have thought that risk was poised to rally today. The first round of the French Presidential election was a tighter race than expected. Socialist Hollande won 27.1% of the vote while Sarkozy was not that far behind with 26.7%. The French left, which has called for ECB rate cuts and a re-negotiation of the EU's Fiscal Pact, did less well than expected, which should have calmed markets this morning. However, weak economic data out of the currency bloc combined with fears about the Dutch triple A credit rating has caused risk aversion to grip the markets at the start of this week.

Dutch budget wrangling hurts risk sentiment


The Netherlands has overtaken France as the largest political risk this week after one of the coalition partners in the government withdrew due to negotiations over the 2013 Budget. This political impasse may lead to fresh elections and could weigh on the nation's triple A credit rating. Holland was once considered a safe triple A nation, however, that may not be the case. Although Holland is in much better shape than other parts of Europe (the impasse is over how to cut the deficit to 3% of GDP next year, before many other countries' plan to do so) Europe's rescue fund needs all the triple A guarantees it can get. Thus, the markets now have to factor in Dutch political risks when trying to price assets.

That wasn't the only thing dampening risk appetite today. The Eurozone announced that the euro-region's debt jumped to 87.2% of GDP last year, the highest ever level in the history of the single currency. There were some pockets of good news amongst the bad, however. Ireland's budget deficit in 2011 was 13.1% of GDP last year down from the enormous 31.2% in 2010. However, the country still has a long way to go before it reaches the 3% of GDP requested by the EU's new Fiscal Pact.

Growth concerns hurt euro sentiment


Growth (or a lack of it) is also weighing on the markets today. Spain announced that first quarter GDP contracted by 0.4%, the second consecutive quarterly contraction, which means that Spain is now in a technical recession. This pushed Spain's 10-year bond yield above 6% at one stage this morning, although it has since retreated to just below that important level on rumours that the ECB was checking levels, whatever that means. Spain wasn't the only country to suffer selling in its bond market this morning, French yields rose along with Dutch yields, which rose to their highest level since early April and are currently testing the 200-day moving average resistance at 2.42%. Above here opens the way for a move to 2.6% - the highs from mid-March. If Holland's credit rating is changed or put on negative watch then we could see a sharper acceleration in bond yields.

April's flash PMI's in the currency bloc also disappointed on the downside. Weakness was split across member states. French and German manufacturing data was much weaker than expected falling to 47.3 and 46.3 respectively. Although German services PMI was slightly stronger than expected, it failed to boost the Eurozone composite reading, which plunged to 47.4 down from 49.1 in March. This is the lowest reading since November last year when sovereign debt concerns peaked and Spanish bond yields surged to 6.7%. Thus, further weak data could put extra upward pressure on sovereign bond markets in the currency bloc.

Is another summer malaise upon us?


Interestingly, in recent weeks the bulk of data disappointments were focused in the US, but it is starting to look like it may have now moved across the Atlantic. If data continues to come in weaker than expected we could see sovereign stress levels start to rise even more. This is especially the case if Germany starts to weaken. Last week the euro was buoyed by stronger ZEW and IFO data from the currency bloc. As we have said German economic strength is more important for the euro than Spanish bond yields, thus today's data miss has weighed heavily on the single currency.

Market moves:


The euro was under pressure from the open as any positive vibes from the French election, Chinese PMI data or the boost to the IMF firewall was ignored by the markets. 1.3150 is currently holding as good support, but below here 1.3080 then 1.3056 - the bottom of the daily Ichimoku cloud chart - are the only things that could break a fall in EURUSD towards 1.30. We still think that 1.30 is looking vulnerable, however at the moment we are in risk-on/ risk-off mode which is keeping things fairly range-bound. We need to see systemic risks recede and fundamentals to take over before we may see a sustained decline in the single currency in our view.

The yen crosses have also been big movers today. There are two reasons: 1, the yen is benefitting as risk aversion grips the markets and 2, there were reports that the Bank of Japan may hold off on buying longer-maturity bonds at its April 27th meeting where it is expected to increase the size of its Asset Purchase Programme. This has weighed on EURJPY and GBPJPY. The latter is close to key support at 130.00, which could break this pair's fall, while EURJPY is trapped in a fairly tight range from 107.70 on the upside (50-day sma) to 105.50 on the downside (200-day sma).

The Spanish stock market is once again taking the brunt of Spain's sovereign concerns and is a mere 20 points away from its March 2009 low. It will be interesting to see if bearish sentiment weakens as it gets close to this level or if the bears can push it through this level to target lows not seen since the bubble popped a decade ago.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957  | e: kbrooks@forex.comw:

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