Sovereign yields continued to be the bane of the euro bulls’ lives, as Fitch came out in European trade and suggested what everyone already knew - that Spain will miss its deficit targets by some way.
Comments from the Austrian Finance Minister suggesting Italy may need a bailout at some stage also didn’t help sentiment, although Mario Monti did refute this later on in the session. It is hard enough holding Spanish debt at present, given the fears it will miss deficit targets, lack of growth, unemployment and subsequent austerity that will only inflame these problems, but there is concern if the bank bailout/loan comes from the ESM, you will be subordinated as well; all-in-all not a very compelling case to hold Spanish debt.
It also seems the change in sentiment we saw on Monday is really based on the fact that Spain refuses to accept the real cause of the problems that real estate losses, which could increase anywhere between 15 % and 35%, will place greater strain on a country which already has limited growth prospects. Spanish ten- year yields did push to 6.83%, but as risk appetite came back into the market, they subsequently found buyers and closed at 6.70, helping EUR/USD trade from 1.2443 to re-claim the 1.25 handle.