Euro Stabilized But Remains Vulnerable

Euro stabilized from yesterday's sell-off after Spain and Italy banned short selling of stocks. Overall sentiments also recovered mildly after China manufacturing data showed mild improvement. However, the common currency, as well as other major currencies and risk markets, remain vulnerable to deeper selloff as worries in the eurozone won't go away quickly. It should be noted again that Spanish 10-year yield made another record high at 7.565% yesterday before settling around 7.5%. It's getting more likely that Spanish 10-year yield will head to 8%, rather than coming back below 7%. Decisive move beyond 7% is seen as a development that would trigger a sovereign bailout within weeks. Meanwhile, Italian 10 year yield also followed and reached as high as 6.426% yesterday.

In Spain, it's reported that majority of regions will likely miss deficit targets this year and more will come to seek assistance from Madrid. Valencia was the first of Spain's 17 autonomous region that tapped the newly established EUR 18b fund last Friday. Catalonia, Castilla-La-Mancha, Murcia, the Canary Islands, the Balearic Islands have already expressed that they might seek aid. Others could follow including Andalucia, Cantabria, Extremadura, Galicia, and Navarra. Spain will auction 3- and 6-months bills today and would likely see much higher borrowing costs and it's uncertain if demand could stay robust.

There were talks over the weekend that IMF could refuse to release the next tranche of fund to Greece. However, The Washington based fund said today that it's "supporting Greece in overcoming its economic difficulties." And, "an IMF mission will start discussions with the country's authorities ... on how to bring Greece's economic program, which is supported by IMF financial assistance, back on track." Troika will return to Greece today and its findings would decide whether Greece will receive EUR 31.5b of aid by September.

Moody's downgraded the outlook of Germany, the Netherlands and Luxembourg's AAA credit ratings outlook to negative, citing "rising uncertainty" in the eurozone. Moody's said that there's increasing risk of Greece exit and support for Spain and Italy. And, "given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form."

In China, HSBC preliminary PMI manufacturing improved to 49.5 in July, comparing to 48.2 in June. The data suggests that prior easing measures are starting to work and the contraction in manufacturing could have slowed. Looking at the details, production improved to 51.2 and was above 50 for the first time in 9 months. New orders and new export orders both improved even though remaining below 50. Looking ahead, eurozone PMIs will be the main focus in European session. Canadian retail sales and US house price index will be released in US session.