Debt Contagion Spreads to Italy, Belgium. Global Markets Tumble

Financial markets remained under pressure with Wall Street tumbling and the dollar soaring to a 2 1/2 month high against the euro. Debt contagion accelerated further in the European periphery. In bond markets, US Treasuries and German bunds strengthened while Spanish and Italian yield spreads widened to record highs. In the commodity sector, oil prices plummeted as bourses weakened. Moreover, industry report showed that oil inventories rose last week. The front month contract for WTI crude oil slipped to as low as 83.55 before closing at 84.11, down -1.89%. Precious metals rose across the board with the benchmark gold contract surging +1.47% to settle at 1386.1. Benchmark contracts for silver, platinum and palladium also gained +3.91%, 1.33% and 1.17% respectively.

Sovereign concerns about debt-ridden European countries remained elevated even though a bailout program of 85B euro for Ireland has been approved. The rescue program's impacts on easing worries were short-lived and the market soon began speculating Portugal as the next country following Ireland to seek help from EU/IMF. Look at bond markets, yield spreads between peripheral European bonds and German bunds continued to widen. While Greek and Irish spreads were the widest, Spanish and Italian spreads accelerated and reached record highs. A similar picture was seen in CDS spreads and we find it particularly interesting that Italian and Belgium spreads were widening fast.

In Asia, China reported the Purchasing Managers' Index (PMI) expanded to 55.2 in November from 54.7 a month ago. This is the strongest reading in 7 months and signaled the country's manufacturing activities have been growing robustly despite the government measures. Asian shares fluctuated after the report. While investors were encouraged by the strong growth, it also fueled tightening concerns as the government may accelerate measures to control inflation.

Gauges for manufacturing activities will also be released in Europe and the US later. In the US, ISM manufacturing index probably eased to 56.5 in November from 56.9 a month ago. We will also get some employment data in the NY session. ADP will probably report +65K addition of payrolls last month while Challenger's estimates for job cuts may have been lowered from 31.8% in October.

We will also get EIA's weekly oil inventory report. The market forecasts crude and distillate inventories fell while gasoline stockpiles gained in the week ended November 26. The industry-sponsored API estimated crude inventory drew -1.4 mmb while both gasoline and distillate recorded stock builds.

Let's Look at The Charts....5 Year Sovereign CDS Spread and 10 Year Yield Spreads

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