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It is said that markets tend to trade on a path of least resistance; at the moment that path is one that involves hammering peripheral European assets and dragging the Italian economy further into the mire. Spanish and Italian bond yields moved yet higher yesterday as investors became more and more nervous about the funding position of the governments. The governments themselves are also concerned; Spanish PM Zapatero cancelled a summer getaway to remain in Madrid while it seems the Italian government recess has been postponed so discussions can be had.

Rumours in these market are two-a-penny at the moment but yesterday a fair few proved to be correct. Firstly, Natixis, a French bank, went on the record saying that Italy would have trouble funding itself with yields above 5% (they currently sit at 6.257%) and that they should ask for financial support from the EU. This was then followed by the news that the Italian Finance Minister Tremonti had arranged a meeting today with Jean-Claude Juncker, the Head of the Eurogroup. Another rumour, that the Italians had cancelled their remaining bond auctions for the entire of August and September, turned out to be false however the damage was already done and any sentiment for diving into risk was quickly quashed.

There was also a distinct lack of positivity in the markets following the Senate vote to pass the bipartisan debt deal 74 to 26. President Obama signed it into law ahead of the midnight deadline for extending the debt ceiling. We must now wait on the findings of a bipartisan committee to find $1.5trn of savings by November 23^rd. In what seems like a rare burst of patriotism in the credit agency game, the ratings company Fitch reaffirmed the USA’s AAA rating for now and explained that “despite the intensity and theatre of political discourse in the United States, there is the political will and capacity to ultimately do the right thing”. They also stipulated that a long term plan is needed to make sure that a downgrade is not made over the medium term.

The negativity on the US economic situation was brought into sharp contrast yesterday by the news that US personal spending fell by 0.2% in June, the first fall since September 2009. This means that we have not seen an increase in personal spending in the US since March and, combined with the poor manufacturing number seen on Monday, fears are that further GDP announcements will see a slide back towards recession.

Unfortunately today is unlikely to galvanise the bulls as we expect the slew of data from the services industries (EU 9am, UK 9.30am, US 3pm) to show further slowing in Q3 while news from the European periphery will remain important. In the past few minutes we have seen the Swiss National Bank intervene to weaken the Swiss Franc as well by reducing the interest rate on CHF LIBOR to as close to 0% as possible.

Latest exchange rates at time of writing