Economic Fears Add to Sovereign Woes in Europe

More ratings downgrades and slowing economic data in Europe raises fears about growth, German unemployment set to fall, Japanese retail sales continue to recover, US debt ceiling row overshadows growth concerns

Yesterdays downgrades of Cyprus by Moodys and Greece by S&P have refocused the markets attentions back onto the euro zone, even amongst all the trials and tribulations across the Atlantic Ocean in the US, with respect to the debt ceiling and fears about the USs AAA credit rating.

Combined with the recent slowdown in economic data in Europe, particularly in peripheral countries, the fear remains that contagion could well be starting to spill over into Italy and Spain.

Rising bond yields continue to reflect the stresses in the financial system especially in relation to Spain and Italy.

Yesterdays disappointing Italian business data has raised concerns about the ability of Italy to grow, in the face of a shrinking economy, spending cuts and a high euro.

Higher than expected German CPI data for July yesterday has also raised fears that the ECB may look at raising rates again in the near future given Noyers comments earlier this week. Concerns about German economic data have already started to manifest themselves in shrinking consumer confidence, falling PMIs and poor retail sales figures. Todays release of unemployment data is not expected to add to these fears but it wouldnt be a surprise if it did. Unemployment for July is expected to fall by 15k, while the unemployment rate is expected to stay unchanged at 7%.

Euro zone consumer confidence for July is also expected to remain at fairly low levels with expectations of another negative figure of -11.4, while the business climate index is expected to decline as well to 0.83.

In signs that Japanese consumers are slowly regaining their confidence after the tsunami three months ago, retail sales for June continue to improve on previous months with both the month on month and year on year figures moving into positive territory. Monthly retail sales rose 2.9% well above expectations of 1.5% and lifting the year on year figure into positive territory to 1.1% against expectations of a decline of 0.5%

In the US continued fears about economic recovery are playing second fiddle to the wranglings around raising the debt ceiling and agreeing a budget. Yesterdays Beige Book showed growth slowing in 8 out of the 12 regions, with particular concern with respect to the housing and employment market. Republicans plan to vote today on a reworking of speaker John Boehners proposal to cut nearly $1trn over 10 years. As the sides move closer together one of the sticking points appears to be the Republican demand for a second debt limit vote before the 2012 elections.

Weekly jobless claims are due out later this afternoon with hopes that the number will start to come down to the levels seen a couple of months ago when the numbers were below 400k.

ARABIC SPEAKERS can watch Ashraf today LIVE on Arabiya at 8:30 GMT (12:30 Dubai Time)