Talking Points

• US Dollar Soars as Markets Rethink Berlusconi Resignation Rally
• S&P 500 Futures Sink, Pointing to Continued Risk Aversion Ahead
• Ben Bernanke Speech Unlikely to Offer Insight on Policy Outlook

The boost to risk appetite following news thatItalian Prime Minister Silvio Berlusconi will step down following next week’s austerity vote proved fleeting, withS&P 500 futures sliding and the safe-havenUS Dollar trading higher against most of its leading counterparts. As wediscussed in detail yesterday, traders were most concerned with the ability of any government – whether it be that of Berlusconi or otherwise – to be meaningfully effective at pushing through deficit-reduction measures to avoid a meltdown in Euro Zone’s third-largest economy as it prepares to roll over €14.9 billion in debt this month. As such, traders initially welcomed the welcomed the Prime Minister’s resignation announcementbecause budget cuts would be passed beforeagovernment reshuffle.

Sovereign risk was quick to creep back into the markets however, and that is not altogether surprising.Passing austerity measures is not the panacea, with Greece as a case in point.The prospect of early elections – complete with inter-party squabbling and feverish coalition-building – as opposed to the installation of a competent technocrat care-taker governmenthardlyseemslike something that ought to havereassured the markets. Budget cuts need to be implemented after being passed, and slashing fiscal largesse is all the most difficult when politicians are trying to vie for votes. On balance, this keeps alive fears that the worst-case scenario for the Euro Zoned debt crisis – a meltdown in a country too big to be bailed out with currently available resources – remainsacredible near-term possibility.

The European economic calendar is relatively quiet, with traders looking ahead to a speech fromFederal Reserve Chairman Ben Bernanke as the next major bit of scheduled event risk.Last week’s disappointing ISM manufacturing- and service-sector figures as well as a dovish FOMC outcome rekindled QE3 expectations, with investors now on the lookout for any signs of an emerging consensus favoring further stimulus. With that in mind, Bernanke is scheduled to give welcoming remarks at a conference on “Small Business and Entrepreneurship” with no Q&A to follow, so the possibility that any meaningful policy clues will emerge out of the ordeal seems minimal.US stock index futures are extending losses while the spread between Italian and German 10-year yields as well asperipheryEuro Zone CDS ratesare pushing higher, pointing to continued risk aversion ahead that stokes the greenback against itssentiment-linked counterparts.

Related:Australian, NZ Dollars Lower After Softer Chinese CPI

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Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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