European Debt Woes Push Dollar Higher

“Spexit” – short for a Spanish exit from the eurozone – is the new word leaping off the tongues of market analysts, with investor attention centred on problems in the Spanish banking sector. Though the European Union has offered Spain more time to sort out its budget problems, news that Madrid will have to fund the Bankia bailout by selling more government bonds sent Spanish and Italian bond yields shooting higher yesterday, with Spanish 10-year debt hitting 6.65% and equivalent Italian debt climbing 15 basis points to 6.02%. Economists regard the 7% mark as a critical threshold as far as borrowing is concerned – Greece, Portugal and Ireland all received bailouts when yields on their debt reached similar levels.

In stark contrast, yields on the 10-Year US Treasury Note hit an all-time low yesterday of just 1.627%, while yields on 2-Year German sovereign debt also fell to a record of 0.002%. The euro fell below $1.24 for the first time since July 2010, while the Dollar Index gained 0.65%, recording its first close above 83.00 since September 2010. WTI crude lost nearly $4 – a testament to the strength of this “risk off” move.

We've seen a nice little gold rally over the last 24 hours though, despite the strong-headwinds in the form of the rising dollar. Gold’s foray below $1,540 early yesterday afternoon GMT attracted the usual array of Asian buyers – both sovereign and private – who remain committed to long-term accumulation of gold. Silver received strong bids around $27.50, though it is struggling to recapture support around $28.50.

Some relief could come for markets from an Irish “Yes” vote in a referendum today on the new eurozone fiscal pact. The Irish government is predicting a 60% win for the yes side. Ireland is the only eurozone country that will be putting the treaty to a vote (as is required by its constitution). Whether or not this EU victory drowns out the cacophony of bad news from Spain remains to be seen.