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Global capital markets have shrugged off yesterday's continued slide on Wall Street. Most major equity markets are higher. The dollar is stronger against the euro and appears to be trying to stabilize against the yen.



eked out a 0.1% gain, helped by an apparent rotation out of exporters, technology issues and into what are seen as defensive sectors like utilities and railways. Profit-taking was seen in the red-hot pharmaceutical sector. Meanwhile Japanese government bond yields rose to their highest level in nearly a month. Supply from municipal governments and corporations exacerbated the market's digestion problems after the

Ministry of Finance's

monthly 10-year bond auction yesterday.

Japan still can't seem to get its act together.

Symbolically this is represented by a foreigner being honored with the highest rank in sumo wrestling for only the second time in history. More substantial was news that April auto output fell 6.5% on a year-over-year basis. This follows the 3.8% increase in March, and marks the fifth decline in six months. Perhaps most important was yesterday's newswire story suggesting that the government's tax commission is studying whether to increase the consumption tax from 5% to raise revenue. This is a no-brainer: It shouldn't even be considered. Consumption in Japan must be encouraged if the nation is to recover from its economic plight and enjoy domestic-led growth.

Most European bourses are posting modest early gains.

The pharmaceutical sector is being buoyed by U.S. approval of one of

SmithKline Beecham's

(SBH) - Get Sally Beauty Holdings Inc. (Name to be changed from Holdings Inc.) Report

new drugs. Bottom-fishing is helping telecommunications issues recover from their recent slide. Some technology shares are also among the advancers. European bonds are largely steady. There has been some minor widening of 10-year bond spreads against bunds, perhaps a muted expression of safe-haven buying.

A fresh development in the eurozone has been the apparent capitulation to Italy's demand that its wider budget deficit be accommodated. Previously, Italy had agreed to reduce its budget deficit to 2% of GDP this year. Yesterday, after much haggling, the other eurozone members agreed to allow it to raise it to "no more than 2.4%." My own guesstimate, for what it's worth, is that unless economic activity picks up and soon, Italy will have trouble meeting even that target.

Moreover, Italy is unlikely to be alone.

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Perhaps that is why other countries were prepared to go along with the revisions. The

European Commission

and the

European Central Bank

have warned that Germany and France, among others, are not sufficiently pursuing deficit targets.

This concern on the fiscal front, coupled with price pressures in several countries, like Ireland and Spain, casts a shadow over the monetary union and encourages skeptics to wonder if the process of convergence is becoming one of divergence. And then, isn't Germany's finance minister confusing the proverbial splinter and mote when he speaks of growing concern about a nonsoft economic landing in the U.S.? Hello? Hello? The porch light's on, but is anyone at home?

The dollar slid toward 121.60 yen before recovering.

Gains above the 122.50-yen level are needed to give confidence that a low of some significance is in place. The euro and Swiss franc have given back most of yesterday's gains. The Finnish finance minister confirmed yesterday that not only hasn't the European Central bank intervened to support the euro, but that no one has proposed that it should.

European officials are attributing the euro's weakness to the dollar's strength

, which is being driven, they argue, by cyclical rather than structural considerations. Eurozone officials are still "betting" that their economies rebound over the next six months. Look for the euro to move toward $1.0350, roughly last year's equivalent low, before that issue is resolved. Indicative prices in the options market suggest little more than a 10% chance that the euro will fall to parity against the dollar some time this year.

With their currencies falling to two-month lows yesterday, both Mexico and Brazil intervened in the foreign-exchange markets. It is the first time Mexico's central bank has intervened in four months. A wider-than-expected April trade deficit and the prospect of regional contagion from concerns about the depth of the Argentine recession were the ostensible causes. At the same time, the weekly auction produced a 5-basis-point rise in the benchmark 28-day cetes (T-bill) rates to 19.80%.

The interest rate implied in the Brazil futures market is above the overnight rate, reflecting the growing belief that interest rates have bottomed for the time being, ending the four-month rally. Yet, given the simply incredibly performance of Brazilian and Mexican capital markets since the former's devaluation in January, profit-taking and portfolio adjustments as the first half winds down should not be surprising, nor necessarily viewed as unhealthy. The threat of higher U.S. rates is also encouraging the position adjustments and may add another source of pressure on the

Federal Reserve

, which it may not have anticipated. Fears of an Argentine devaluation are easing following its threat to unilaterally dollarize.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the stocks, currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at