The European Finance Ministers Statement
This is arguably more important than the G20 in the near term, and was also released overnight by the German, French, Italian, Spanish and British finance ministers. It is a direct response to Eurozone peripherals turmoil, making the most explicit commitment yet that talk of an orderly crisis resolution scheme does not apply to current or issued debt up to 2013: "whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any programme under current instruments." This is good news for Eurozone peripheral bondholders. It does not remove long-term debt sustainability concerns, but it does remove a good deal of uncertainty surrounding the implications of current European discussions on orderly restructuring beyond 2013.

Where does that leave us?
Even though the EU news has been positive, talk of further tightening from China and a sharp drop in Chinese equities has set a risk-reduction tone to the day. The market's largest positions have been hit: AUD and SEK are the worst performers in the G10, and $/Asia is suffering from a broad sell-off. But looking ahead, the key thing to watch is whether the EU finance ministers' statement will be sufficient to reverse the collapse of peripheral Eurozone bond markets, and whether there any signs of the ECB stepping in with more aggressive purchases. Italy comes in with new bond supply at 10am, an auction which markets will pay attention given the new wides in Italian-German spreads yesterday.

For EUR/USD, 1.3550 is the medium-term level we have been mentioning over the last few days. In yesterday's FX weekly, we wrote that there are tentative signs of contagion, but this morning there are increasing signs of stress in both money markets and financials, with the EUR/USD basis, one of the key indicators we have been watching, significantly wider. A break below 1.35-1.3550 on the back of a failure of peripherals to stabilize would be a clear and significant setback to our view that EUR/USD will make new highs this year, exceeding the typical 3%-5% pullbacks. But if we hold and the week finishes on a more positive note for peripherals, buying EUR/USD with a tight stop below 1.35 looks tempting.

David Fuller's view Irish government yields pulled back today as fears that creditors would be forced to take a haircut on outstanding debt subsided somewhat. Rates are still elevated so additional downside follow through will be required to confirm that a meaningful peak has been reached. Given the hyperbole surrounding the Irish market, this article by Donal O'Mahony of Davy Stockbrokers helps to put some of the more bearish commentary in perspective.