Risk Aversion Back On Spain And Greece

Risk aversion dominated the market, following the moves on late Friday as concerns in Spain persisted and worries on Greece resurfaced. Asian equities are broadly lower with the Nikkei down -116 pts while HK HSI down -492 pts at the time of writing. The dollar and yen gained broadly with the Dollar Index edging higher to 83.73 level. Worries in eurozone sent US 10-year yields sharply lower to the historical low of 1.4365% in Asia.

Meanwhile, the 10-year JGB yield also dropped to nine-year low of 0.730%. Lower yields are sending yen crosses sharply lower, including USD/JPY. The aussie and Canadian dollar and sterling were hit hard. But it should be noted that EUR/AUD is staying well below a minor resistance of 1.1791 while EUR/CAD is kept below 1.2500. The common currency is expected to be sold off further against, commodity currencies, sterling and yen.

Talks of a Greece exit resurfaced over the weekend as the Der Spiegel magazine reported that it's clear to EU/ECB/IMF that Greece won't be able to meet it's obligation of cutting debt to 120% of GDP by 2020. And that could have implications of additional aid between EUR 10b and 50b which IMF won't accept. And Der Spiegel said that there's a possibility the IMF would refuse to pay the next tranche of bailout funds for Greece and would result in insolvency in September. The Troika is set to meet with Athens this week to gauge the progress and investors will remain nervous about the situation before knowing the results of the inspections.

Also, there are increasing worries that Spain will eventually seek a sovereign bailout after the benchmark 10-year yield breached 7.3% on Friday. Selling of Spanish bonds intensified after Valencia, Spain's most indebted region, sought help under the EUR 18b program. Murcias said over the weekend that it would seek help . And, Catalonia is deciding whether to tap the emergency loan fund. Foreign Minister José Manuel García Margallo urged ECB to "bet on the euro" and provide support to Spain's bonds. But ECB Draghi has reiterated his stance that the central banks' mandate "isn't to solve the financial problems of states, but to ensure price stability and contribute to the stability of the financial system quite independently."

Egan-Jones downgraded Spain's rating for the sixth time since April to CC+, down from CCC+. The independent rating agency noted that "in addition to the expected austerity riots, the latest news is that Valencia and other regions will need $15 billion of aid, the senior debtholders of the weak banks will be forced to take losses and there might be some sharing of losses among all banks." According to Egan-Jones, Spain has 35% of default next year.