Markets seek reassurances that the EU know how to solve debt crisis

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Fears continue to grow about contagion Eurozone debt as peripheral countries, that now includes both Spain and Italy, continue to struggle as investors still seem to be holding the opinion that Eurozone authorities haven't gotten to grips with the crisis.

At Thursday's EU summit meeting there will be two familiar items on the agenda: a Greek bailout and the broader financial stability of the Eurozone. Bundesbank president Jens Weidmann has said that "to stop the uncertainty, the Eurozone states have to show urgently that they are able to act." For a credible outcome an agreement must be reached on a viable strategy to solve the debt problem not just postpone it again. Another stopgap measure would be almost worse than no result at all.

Furthermore, the Eurozone banking stress tests highlighted the need for greater capital injections in periphery banks but again, the markets are being given no explanation as to where the capital is going to come from.

Given all of these problems it is alarming that the European Central Bank raised interest rates, almost disregarding the potential damage it could do to the periphery. The threat to the Euro still remains and if it wasn't for the ongoing squabble in the US Congress over its deficit reduction plans, the US Dollar would surely be benefiting. If they resolve this, one wonders whether the Euro will still maintain it's current strength.

For investors yesterday, the worries were the same as they have been for a while. European government debt, the US debt ceiling and global economic growth. As for which currency offers the most safety, the Euro and US Dollar do not feature, the Swiss Franc is expensive, Sterling has perennially low interest rates and minimal growth, the Australian Dollar can look forward to falling interest rates, the NZ Dollar is as expensive as the Swiss Franc and the Canadian dollar is too closely linked to the US Dollar. The only choice therefore seems to be Gold, which touched another record high yesterday.

Yesterday's data showed international investment into the US fell by $7 billion, exactly the same figure as flowed into Canada. Overnight, the minutes of the Reserve Bank of Australia's policy meeting did nothing to dispel the suspicion that the next move for Australian interest rates will be downward.

Today's data calendar features the ZEW barometers of economic sentiment in Germany and the Eurozone and also Eurozone construction output data. This afternoon, Canadian leading indicators are out along with US housing starts and building permits. The Bank of Canada also announces its interest rate decision today, with analysts expecting interest rates to remain at 1%, the level it has been at since September.