Intraday Market Thoughts

Euro Pressured by Moody's Notice on Spain

by Kyle Morrison
Jul 29, 2011 9:20

European sovereign risks resurface, as Moodys puts Spain on notice for a possible downgrade, ahead of CPI numbers, UK mortgage approvals set to disappoint, Debt ceiling drama rumbles as markets await US Q2 GDP, Canada GDP.

The single currency continues to be buffeted by the winds of the sovereign debt crisis after this mornings decision by Moodys to put Spain on notice for a possible downgrade. Renewed concerns about political instability in Italy yesterday had already set the tone with bond yields pushing higher. Bond auctions yesterday saw 10 year yields hit 11 year highs as Italy tapped the bond markets for of 2014/2015/2018 and 2021 bonds.

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Demand wasnt great and yields were elevated as the gap between Italian and Spanish borrowing costs continued to narrow as Italys plight continues to worsen. A week ago Italian borrowing costs in the 10 year were 40 points below Spains however now they are only 20 points.

This mornings release of Eurozone flash CPI for July will be closely monitored for evidence of increased pricing pressures in light of the unexpected jump in German borrowing costs earlier this week. Expectations are for the figures to remain the same as last month at 2.7%, however any increase will raise fears of a hawkish ECB meeting next week given Noyers comments about strong alertness a couple of days ago. Given recent events you would have to think that the ECB would be mad to consider being too hawkish next week, but given their recent track record you wouldnt bet against it.

In the UK gilts have become somewhat of a safe haven given the events in Europe and the US, however given recent economic data and this weeks growth figures thats not saying much. Todays mortgage approvals data is expected to confirm that the housing market remains in the doldrums along with consumer sentiment after yesterdays disappointing CBI sales retails figures. Expectations for June are expected to come in around 46k, pretty much unchanged from May.

Japanese industry continues to struggle from the effects of the March tsunami as industrial production for June came in below expectations rising 3.9%, below expectations of 4.5%.

The US debt ceiling story looks set to rumble on into the final strait with still no signs of an imminent agreement and the politicians as far apart as ever. Despite pleas from business leaders and world leaders for politicians to come to some agreement, the uncertainty looks set to drag into the weekend. Ahead of that we have the small matter of US Q2 GDP growth figures and markets will be hoping that the recent uncertainty and poor economic data doesnt translate into a miss on the GDP front. As it is the numbers have already been revised down with expectations now at 1.8%, down from Q1s final 1.9%.

At the same time Canada Q2 GDP is also due out.


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