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SYDNEY (MarketWatch) — Asian stocks recovered from lackluster early Wednesday action to trade mostly higher, with Hong Kong leading the region

Hong Kong’s Hang Seng Index HK:HSI +1.07%  rallied 1.1% after spending time in negative territory, while the Shanghai Composite index CN:000001 +0.02%  gained a more modest 0.3%.

Japan’s Nikkei Stock Average JP:100000018 +0.77%  rose 0.3% after ending the morning session flat, while Australia’s S&P/ASX 200 index AU:XJO +0.75% traded up 0.5%.

http://www.marketwatch.com/story/asia-stocks-struggle-for-traction-2012-06-26

Presented by Gareth Soloway June 26, 2012 01:44PM

With interest rates on 3-month bills tripling since May, investors are clearly nervous about being exposed to Spain, even on a short-term basis.  Normally this would be terrible news for the euro, but the currency took the results in stride.  The EUR/USD also shrugged off a downgrade of Germany's sovereign debt rating by Egan-Jones, the small but extremely respectable rating agency. At the same time, shockingly brash comments from German Chancellor Merkel and Italian Prime Minister Monti also had very little impact on the euro.

The currency pair's resilience in the face of bad news reflects the lack of interest in one-sided positioning ahead of the EU Summit. 

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When it comes to rating agencies, Egan-Jones is considered to be number four in the big three rating agencies; which means they don’t have as much influence as Moody’s, Standard & Poor’s, or Fitch. Regardless of their status among their more established brethren, they do have some influence and know how to make a headline. Egan-Jones often times is a trendsetter in the rating agency business by being more aggressive with their downgrades, and can sometimes be a harbinger of the other three to do something soon. 

http://www.fx360.com

Earlier today, news leaked that German Chancellor Angela Merkel made a comment that Europe will not have shared liability “as long as she lives.”  ZING! The markets were buzzing with the newfound bravado of Germany’s leader. However, everyone soon realized that this quote was from someone who overheard her say it to a constituent at a political party event. Not exactly the credible source that you would want to quote when it comes to economic policy. Nonetheless, the comment wasn’t really that far adrift from what she has been saying all along. Germany does not want to give the struggling nations of the Eurozone money and then watch them burn it up recklessly. They want responsible governance that will give them more confidence in giving that loan. In other words, they are insisting on austerity; and until the countries with their collective hands out agree to Germany’s stipulations, Ms. Merkel and her cohorts will continue to deny the assistance required.

http://www.fx360.com/

Soros doesn't say it specifically, but just taking this step would probably massively improve peripheral borrowing costs (in Spain and Italy) simply thanks to the expectation that there was a path in place to take the worst-case scenario (a sovereign blowup in either of those two countries) totally off the table.

Read more: http://www.businessinsider.com/soros-on-how-to-fix-the-euro-crisis-2012-6#ixzz1yr52f0l1

Investors continue to buy the greenback for one reason only and that is deleveraging. To deleverage means to reduce risk and with the high level of uncertainty in the Eurozone, investors around the world are cutting back on any risky positions. In other words, even if the U.S. economy is worsening and the Federal Reserve is implementing measures that make the dollar less attractive, if the level of fear in the market remains high, the dollar can still rise. 

One common measure of fear is the VIX index and the following chart shows the strong correlation between the VIX (white line) and the Dollar Index (orange line).  When the VIX rises, the dollar appreciates and vice versa which tells us that fear is driving investors into the arms of the greenback.

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