FX: Consumers More Optimistic but Concerns About Europe Remain

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According to the latest U.S. consumer confidence numbers, Americans are feeling more optimistic this month which explains why they have grown more willing to spend. Every single one of the major consumer sentiment reports have pointed to an improvement which would normally be extremely well received by the market if not for the risks in Europe. In fact, if this were more normal times, we could even argue that the U.S. is on its way to recovery following the increases in spending and sentiment. Unfortunately the fiscal battle in Washington and the ongoing crisis in Europe leaves the U.S. economy vulnerable to further weakness. Americans grew more optimistic about present and future economic conditions as the consumer confidence index rose to 56 from 40.9, the largest increase since 2003. This has helped to lift equities and currencies but investors will still have reservations about the sustainability of any rally until there are signs of progress in Brussels.

Safe haven flows in general continued to ease out of the greenback as investors hold out the hope that European officials will make progress on the EU debt crisis at the Eurogroup meeting today and the ECOFIN meeting tomorrow. Unfortunately the initial headlines points to more setbacks with the EFSF now said to be leveraged to less than EUR 1 trillion, which would not be enough to cover Italy. This is not the time to compromise on the size of a package unless they want to waste their money and be forced to revisit this discussion again in the future. Talks of an ECB/IMF deal have also been revived which implies that the Europeans are really having trouble coming up with any new schemes to stabilize the region. We will continue to be watching the headlines closely but if you have read our recent reports, you will know that we are extremely skeptical of the will and ability of the Europeans to put their personal agendas aside and do whatever it takes to resolve the debt crisis. The rally in the euro today was sparked by what would normally be extremely negative news for the currency. Italy sold 3 year bonds at an average yield of 7.89 percent and 10 year bonds at an average yield of 7.56 percent. Investors were relieved that yields did not cross the 8 percent mark but 7.89 percent is already too burdensome for Italy. Also, as we have warned, rating agencies are becoming aggressive making further downgrades the greatest risk for the euro. There are reports that S&P could revise their outlook for France's credit rating from stable to negative over the next 2 weeks which would be the first step towards cutting their AAA rating.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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