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Battles between politicians in Europe and the US smashed banking and financial sector stocks lower yesterday while the market was still coming to terms with the detail of Friday afternoon’s stress tests. Major High St names such as Barclay’s, Lloyds and RBS all lost over 5% in trade with speculators taking risk off the table and betting that one of these debt showdowns (be it in the US or the EU) will blow up soon. Italy seemed to be the hardest hit market as regulators had to close the exchanges as prices were deemed to be falling too quickly.

The dollar, Swiss franc and the Japanese yen all benefited from the search to safety while gold hit another all-time high of $1600oz. Politicians were quick to rubbish talk that the negotiations were getting increasingly nasty with US Treasury Secretary Tim Geithner saying “Despite what you hear, people are moving closer together. You have seen the leadership of the Republican party…take default off the table. That’s encouraging”. Unfortunately President Obama did also state that he would veto the Republican’s latest plan if it came to him for a signature. Some people have to move still closer it seems.

The euro has bit back a tad this morning after some encouraging headlines from the Eurozone. Firstly the German paper Die Welt is saying that European governments may enforce a levy on banks in order to account for some kind of private sector contribution to the Greek aid package. This was followed by the Greek Finance Minister saying that a deal is attainable on Greek debt at the meeting of EU ministers on Thursday. Unfortunately as we can see from rising bond yields elsewhere in the eurozone, the crisis has moved on from Greece and while dealing with patient zero is one thing, the contagion must be a priority. Germany is also expecting Swiss banks to deliver as much as 10 billion euros owed by tax evaders under a proposed tax agreement with Switzerland, Handelsblatt said, citing government officials it didn’t identify. Even so, GBPEUR is back below the 1.14 level and EURUSD is above 1.41; such is the strangeness of these markets.

This euro run could be dealt a blow by the German ZEW number due at 09.00. Market conditions have weakened once again in Europe since the last reading and the uncertainty surrounding the Greek and other peripheral debt solution is dragging on. We expect it to fall further into negative territory towards the -14 level. We also have a Spanish bond auction today of medium term debt and we, any anybody else interested in Europe’s progress, will be watching to see if the yields continue to spike higher.

Latest exchange rates at time of writing