httpvh://www.youtube.com/watch?v=qKgZgjOIj4M

Markets are becoming increasingly messy as the push and pull of different geopolitical and economic concerns turn increasingly violent. Fears over what will happen in Korea coupled with the lingering concern over Spanish debt has left traders once again unable to justify backing risky assets and instead they are sheltering in haven assets en masse.

The contagion of Greek debt problems have definitely spread now to Spain; I don’t think we’re in any doubt about that. After the news that a Spanish caja had to be propped by the Bank of Spain over the weekend it was clear that this was not just a one off event. Subsequently we saw 4 other Spanish cajas agree to merge together yesterday in an aid to save themselves from a similar fate. There was also market rumours that a major Spanish bank was in major need of liquidity provision. This turned out to be unfounded although the fears still exist. The Spanish did complete a short-term debt auction yesterday although the yield was up and the bid/cover ratio was down

These fears saw risky assets move towards their recent lows once again with EURUSD moving to 1.2180 and GBPUSD to 1.4264.

All of this was going on at a time when the world had an eye on Europe but also South-East Asia; in particular the Korean peninsula. Relations have once again deteriorated between the North and the South with Pyongyang now severing all ties with Seoul. While we believe there is little chance of all out conflict the sabre-rattling is just another excuse for risk-averse investors to take their money off the table, limiting liquidity and making the market that much more volatile.

Back in Blighty we had the Queen’s speech which confirmed that the new government’s No.1 priority is enacting fiscal responsibility and reducing the deficit. It does however look like, as it so often is, that it is the middle classes that will face higher taxes. This is most likely to come in a move in the rate of CGT “closer to those applied to income tax” whilst also raising tax on those earning  above £45kpa. The markets took to it well however, as we said yesterday, it is the emergency budget on June 22^nd that is the next major hurdle for GBP.

Data yesterday was positive for risky assets even if the news wasn’t. UK GDP came out as expected at 0.3% and although exports and consumer spending were low, manufacturing was a good amount higher. We expect the consumer spending element over the summer as the election fades from memory. US consumer confidence was also a lot better than expected; a figure that dragged equity markets off their day’s lows and gave them chance of a fight back.

Economic news today is fairly light although the Gfk consumer confidence measure for Germany has just been released at 3.5 against an estimate of 3.6. This has fallen from a previous figure of 3.8 and is symptomatic of the lack of confidence   currently being displayed on the continent. Other than that we have UK BBA mortgage approvals at 09.30 and US home sales at 15.00