Spanish borrowing costs increase as Eurozone jitters return; against a backdrop of positive US data

Tom Tong23/Mar/2012Currency Updates

EUR

The Eurozone economy unexpectedly contracted sharply this month; signalling a return to recession; Germany and France have begun to reel in the effects of South Europe’s woes. Market sentiment deteriorated further as Eurozone data was worse. The PMI of March came in at 48.7, down from 49.3. Anything below 50 signals a retraction in the economy. What is more concerning is that the figures showed a contraction in French and German manufacturing: the spearheads of Europe. This is in part due to Chinas falling demands for Eurozone goods. The Eurozone industrial orders – which offer a guide to future production levels – fell to 2.3% in January. The problematic nature is still highly emphasised in the periphery of the bloc; Ireland has reported that is is back in a technical recession. Ireland’s GDP fell 0.2 % in the fourth quarter, following a 1.1% decline over the previous 3 months. Additionally, Spanish borrowing costs returned to January levels as bond yields grew. Economist readings of a 0.2% contraction in Eurozone GDP in the first three months of 2012 have thus far been consistent. Last night the Eurofirst 300 closed down by 1.1%. Nevertheless, the European Commission has recommended increaseing the size of the Eurozone’s €500bn rescue system to €940bn by combining the old system with a new facility which could commence this summer. Fundamentally, this will add to stability measures already implemented, easing markets. Another interesting fact is that Italians have begun to buy their sovereign debt in the forms of bonds. Orders for the four-year bond, which could be bought online without paying bank commissions , reached €7.29bn .

GBP

Hopes that a consumer revival will drive growth in the first quater withered after a sharper-than-expected fall in retail sales and a drop in consumer confidence. The ONS reported a 0.8% fall in retail sales volumes in February, the worst performance in nine months. This subsequently triggered a depreciation in GBP against the greenback in early morning trading GMT. However, the bad news did not end there, the ONS’s initial estimate of a 0.9% rise in January sales was revised down to 0.3%. The weak consumer outlook was reinforced by Nationwide’s report that consumer confidence fell three points in February to 44, again releasing gloomy fumes. Negativity was further underlined by the Local Data Company, which indicated that the shop vacancy rate rose to 14.6% in February, the highest level since 2008. Yesterday, the FTSE 100 closed down 1.1%. Moreover, this weeks budget announcement has brought a glimmer of hope to strong UK revivals in coming years. Multinationals, particularly GSK have declared interest in creating jobs in Britain. GSK has confirmed that it will be creating 1,000 new jobs in response to tax breaks for goods that are created in the UK.

USD

Similarly to the FTSE and Eurofirst, the S&P 500 closed down 0.7% as well as the Dow Jones closing down. Nonetheless, the US government bonds continued to claw back their recent losses with the yield on the 10-year Treasury down 2 basis points to 2.26% The benchmark has struck a five month high of 2.39% this week. The good news lay in the US jobs market where initial jobless claims fell by 5,000 last week to a fresh four year low and Conference Board’s February leading economic inidicator reached its highest level since June 2008. This in part led to gold losing its lustre as investors become lured by signs of US recovery. The Dollar index gained 0.1%.

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Written by Tom Tong

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