The euro, which had been sold off at the end of last week, has finally found some stabilization as we move through Tuesday's New York trading session.

Overnight, risk aversion seemed likely to be a major theme as Italy's yields jumped yet again, with the 10-year hitting 5.75% at one point, and coincided with an Italian auction of 5-year debt that showed weaker than expected demand and higher borrowing costs for Italy's government.

However overnight we also had positive development in the Euro-zone sovereign debt crisis as German Chancellor Angela Merkel came out and said that Germany would not allow a uncontrolled insolvency in Greece. Merkel and French president Nicolas Sarkozy are due to talk to Greece Prime Minister Papandreou tomorrow in a conference call. That gave today's market some optimism that the core of Europe may again put their weight behind Greece. What Greece would need to do is to ensure France and Greece that they are able to meet their deficit targets spelled-out in the second bailout from July 22nd. That includes privatization of state assets as well as increasing the tax intake of the government and spending cuts. So far Greece has had to impose a new 2billion levy on real estate to make up a shortfall the EU/IMF had seen with in its books.

The fear of contagion - a domino effect in which European banks with exposure to Greece suffer losses, and pressure increases as those banks sell bonds from other periphery nations such as Portugal, Ireland, Italy, and Spain. Italy has come under the microscope and has contributed to a lot of weakness of European equities and the euro. Yesterday, we had reports that China may come and help Italy by investing in the country or by buying its bonds. However, so far that story does not provide any kind of monetary figure for any Chinese support, and Chinese officials would still have to debate whether to take on the risk of buying Italian assets.

All in all, the sovereign debt crisis took a pause today - though we note that Italy's 10-year did rise - with equities  managing to pare losses in Europe, and the S&P500 futures which were negative overnight were positive in positive territory around noon New York time.

The key event therefore tomorrow is what we get out of that Germany, France, and Greece conference. Some support for Greece from a reluctant Germany would help calm markets.

Otherwise, market participants have firmly placed themselves on the side of believing that a Greek default is almost certain if new measures by politicians are not taken up. If nothing else, while Greece may have secured its next installment of aid from the IMF/EU, we are likely to revisit this same scenario after October when Greece again is set to run out of money.

For now the euro dollar is been consolidating in a range between 1.35 and 1.37, as it had become quite oversold following the sharp declines to end last week. With the ECB turning more dovish, and economic prospects for the euro zone weaker heading into the fourth quarter, the euro will remain pressured in the shorts to medium-term.

For the short term we will continue to watch periphery yields (especially Italy), European equities (and bank shares), and what headlines we get from the meeting between Merkel, Sarkozy and Papandreou.

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