Equity markets, commodities melt as eurozone fears resurface

Global markets sank yet again on the back of lingering concerns about political instability in Greece and its possible adverse fallout on its fate in the eurozone. Although the Greek President has announced fresh polls in June, investors are increasingly getting wary of Greece and its potential contagion impact on other weak nations like Spain and Italy. Bond yields of these two nations surged past the dangerous 6% mark, underscoring the mounting worries over their ability to finance their huge debt load. While Greece, facing fresh elections and a possible eviction from the eurozone has dominated headlines, uncertainty over the deteriorating state of Spain's banking sector raised the prospect of an international bailout.

Sentiment towards Spain is turning worse by the day, mainly because of a loss of confidence in the Prime Minister Mariano Rajoy government's approach to tackling the problems in the banking sector. Spain is facing a prolonged slump as the turbulent eurozone struggles to balance austerity with growth. Borrowing costs for Spain jumped even as official data confirmed a recession there. Bankia shares tumbled on reports of large deposit withdrawal but Spanish Deputy Finance Minister Fernando Jimenez Latorre and the lender denied the reports. Bankia said that it expects no big changes in deposit levels. Moody's downgraded 16 Spanish banks as well as 4 Spanish regions.

Data showed that the 17-member eurozone avoided slipping into a recession in the first three months of 2012, thanks to a stronger-than-anticipated show by Germany. However, the outlook remains bleak with Italy and Spain in recession and France on the brink. The UK, which is not part of the euro, is also in recession. Risk remains a dangerous word for now and safety is top priority. The dollar and treasuries remain safe havens.

Crude oil has slumped and even gold has not been spared. The 10-year US bond yield and German bund yields are at a record low as investors turn to safe haven assets. The G8 summit is underway in the US and the top leaders are likely to discuss the eurozone crisis. Whether they will come up with any new measures to stem the tide is anybody’s guess.

Rupee falls to all-time low on strong dollar demand

The rupee fell to a record low against the dollar for the third consecutive day on Friday amid no sign of easing in the global risk aversion. The rupee ended at 54.4250 a dollar after being as low as 54.91. It opened at day's high of 54.60/61 versus the previous close of 54.4850. It had closed at 53.39 a dollar last Friday and touched a weekly high of 53.5350. The BSE Sensex and the NSE Nifty lost 0.5% during the week.

The rupee recovered from intraday low, tracking a recovery in stocks, after RBI deputy governor Subir Gokarn said that the central bank would continue to defend the currency. Gokarn said that the RBI will continue with its intervention as well as administrative measures to support the local currency, which is down over 10% since its February peak. The rupee also recovered as it approached the psychologically key level of 55.

Traders expect the RBI to open a window for state-run oil companies to buy dollars directly from it. Demand from PSU oil firms is estimated to be ~$400-500mn a day. The rupee is down 3.1% so far in May, despite foreigners being net buyers of US$357mn in local stocks and bonds.

The euro touched a four-month low today, extending declines to a third-straight week, amid concern that the eurozone sovereign-debt crisis is worsening. The 17-nation currency was just shy of a three-month low versus the yen after Fitch Ratings downgraded Greece’s long-term credit rating to "CCC" from "B-", citing heightened risk of the nation leaving the monetary union.

The Greek rating cut came as leaders began campaigning ahead of the second national vote in six weeks. The Dollar Index, which tracks the greenback against six leading currencies, was flat at 81.399 after rising on the previous 14 days, the longest winning streak since its inception in 1973.

Rupee hit all time low....what next?

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