Euro Debt Fears Drive Stocks Lower

NEW YORK ( BBH FX Strategy) - Investors are choosing safe havens as global stocks continue to show hefty losses driven by concerns about global growth and the uncertainties about the ongoing eurozone debt crisis.

The EuroStoxx 600 index is just off its lows but still over a net 2.5% lower, having reversed about half the recovery gains seen in late September, and back within 4% of the 26-month low seen on Sept. 23. The MSCI Asia-Pacific Index dropped 2.3% and S&P 500 index futures point to a 0.6% decline at the open after the heavy 2.85% loss in the cash index Monday.

Adding in some part to the demand for bunds (two-year is down six basis points) was the fact that Spanish jobless claims soared in September, with the jobless number increasing by 95,000 and the second month in a row of higher unemployment. Oil is down 1.8%.

The Euro group meeting came and went without providing any clarity about how to reduce the tensions in the eurozone debt market. In fact, it is more likely that meeting injected more uncertainty by delaying the final decision for the Greece aid tranche for at least another month and hinting at a greater investor role for Greece. The Euro group also concluded by cancelling the special meeting planned on Oct. 13 as officials still wait for the troika report on Greece, which won't be ready for another couple of weeks.

Officials stressed that Greece will have enough cash to cope, as all sides are eager to prevent default. The further delay of Greek aid and the fact that there was no agreement on an extension or leveraging of the EFSF will add to concerns that the measures are insufficient to cope with the crisis.

Against this backdrop we expect the EUR-USD to remain vulnerable to more negative news and in turn expect it to remain under pressure in the coming days.

Elsewhere in the G10, the Reserve Bank of Australia left rates unchanged at 4.75% at its October meeting, as expected. The surprise came from the introduction of new dovish language, despite the better-than-expected trade and building approvals data announced ahead of the meeting. In short, the RBA maintains the view that it is still too early for the Bank to cut rates given the effects from the market selloff have yet to flow through into the real data just yet.

China warned Washington over a proposed currency bill, aimed at forcing Beijing to let the yuan rise. The People's Bank of China and the ministries of commerce and foreign affairs accused the U.S. of politicizing the global currency issue. The PBoC said it deeply regrets U.S currency bill and warned that the passage of the bill may seriously affect progress of China's currency reform, which could lead to trade war.

The PBoC justified its position, claiming that the real exchange rate has risen greatly against USD if inflation is taken into account. This is confirmed by the Bank for International Settlements' Chinese REER (or real effective exchange rate) which has increased by nearly 17% since 2005.

The China foreign ministry said it "adamantly opposes" U.S. Senate bill on CNY, claiming it violates World Trade Organization rules and "seriously upsets" China-U.S. trade relations. It repeated that CNY exchange rate is not to blame for China-U.S. trade imbalances.
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