The political unrest in Italy went global yesterday as markets moved into a broad risk-off climate, with news that the country's interim prime minister was unable to form a cabinet only strengthening this stance.
"EURJPY went below 124 and EURCHF headed below 1.14 Tuesday," says Saxo Bank head of FX strategy John Hardy, who adds that the global contagion surrounding the situation may lead to some sort of official response from European Union leaders or the European Central Bank.
"Investors should also watch the Italian bond auctions at 09:00 GMT today as we have €5 billion worth of five, seven-, and 10-year paper up for sale," Hardy says.
In equities, markets felt the sting of the Italian situation yesterday with indices tracking lower around the globe. In Saxo Bank head of equity strategy Peter Garnry's view, it's too soon to start making contrarian moves; "European assets are already oversold in the shorter term," he says, "but we are still waiting for the maximum liquidation point".
One sector to watch is European banks, which Garnry reports are down 22% in what is officially a bear market.
In bonds, Saxo fixed income specialist Althea Spinozzi points to some interesting action yesterday in Italian two-year yields, which closed up 184 bps to 2.70%. In Spinozzi's view, this marks a potential opportunity for investors to sell two-year maturities and buy the 10-year on the broad-based selling of the shorter part of the curve.
Finally, Saxo Bank head of commodity strategy Ole Hansen reports that gold prices are relatively inhibited given the instability with a break of $1,308/oz needed to confirm a rally.
"Gold's relative weakness comes mainly down to a stronger USD," says Hansen.
For more on commodities, equities, and bonds, listen to today's Morning Call in full.