Markets Await German Ruling on Bailout Legality

German constitutional court set to rule on bailout legality, UK industrial and manufacturing data could prompt further dovishness, Australia Q2 GDP, Bank of Japan leaves rates unchanged.

The crisis in Europe remains at the forefront of investors concerns today as the German constitutional court begins its deliberations in ruling on the legality of the Greek and other bailouts in 2010.. Any ruling that that states the bailouts are illegal would throw Europe into absolute chaos. The expected outcome is likely to be along the lines of attach a number of firebreaks or safeguards to any new bailouts by way of giving the German parliament stringent vetoing rights with respect to the release of any new bailout funds. But even the best case scenario will no doubt complicate further an already cumbersome mechanism.

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In the UK, despite last night's speech by the Chancellor reassuring that the UK recovery remains on track despite recent weak data, concerns remain about the state of the UK economy, as evidenced by yesterday’s disappointing BRC retail sales numbers. These fears are likely to increase this morning if July manufacturing and industrial production data show further signs of slowing down or contracting further in the case of the industrial production data.

June’s industrial production data came in flat on a monthly basis and down 0.3% year on year and though July’s number is expected to rise 0.2% the year on year number is expected to slip further to -0.4%. Manufacturing production is set to be slightly more positive improving on a monthly basis from -0.4% to 0%, though the annual figure is expected to slip from 2.1% to 1.9%.

Weak numbers will once more increase the pressure on the Bank of England to embark on more QE at tomorrow’s rate meeting, an outcome which at this moment seems unlikely despite some speculation to the contrary.

Australia Q2 GDP has continued to recover after the negative figure in Q1 and has been able to shrug off all the declines from the Queensland floods. The number appears to support yesterday’s actions by the RBA in keeping interest rates on hold for the time being, as Q2 GDP rose 1.2%, above expectations of a 1% rise while the previous figure was also revised up from -1.2% to -0.9%. These figures suggest that the Australian economy remains a touch more robust than had been initially feared.

The Bank of Japan left rates unchanged as expected, early this morning as the yen gained some ground overnight after the surprise intervention by the Swiss National Bank caught markets on the hop. The amount of stimulus was left unchanged as the bank looked to assess the effect of the measures taken at the last meeting. Yesterday’s yen weakness on the back of this move appears to have been a reaction to fears that the Bank of Japan may well follow suit.