After a good start equity markets lost ground towards the end of the week. Amongst the few equity indices which managed to retain a positive performance throughout the week were the SMI, DAX and NIKKEI. Contrary to German sovereign bonds, Italian sovereigns were able to make up some ground. Commodities corrected sharply during the week with gold losing almost 4% and crude oil also dropping 7% in the same period.
The eurozone composite PMI was unchanged at 46.0 in June. It therefore was slightly above consensus expectations of 45.5, but remained in contraction territory and well below the 50 “no-change” level. In June, a minor fall in the manufacturing component was offset by a small rise in the services balance. However, the overall level confirms the picture of falling economic activity in the region.
The average reading of the headline eurozone PMI index in recent months paints a far more downbeat picture of growth prospects than the equivalent US and UK indices. In fact, it suggests that the region is falling back into recession. Expect the ECB to take additional action soon – the odds of an ECB rate cut are growing.
German business expectations fell in June at the fastest pace in 13 years, according to new data from the ZEW Sentiment Survey. The expectations index declined by a massive 27.7 points to -16.9, the biggest plunge since October 1998. Economists had expected a much more optimistic reading of +2.3. The majority of investors now expect economic conditions to worsen over the next six months, for the first time since January. What’s more, the current conditions index also fell pretty sharply, adding to the gloom.
This fresh data further heightens concerns that the eurozone slowdown is now also hitting Europe’s largest economy pretty hard. Other indicators of German economic activity recently painted a rather downbeat picture, too. Expect German GDP to expand by less than 0.5% this year, with a good chance of worse to come in 2013.
Spanish government bond yields hit a new euro-area high this week, with the ten-year yield topping 7% for the first time. While long-term borrowing costs shot up significantly, shorter-term borrowing costs remain just about manageable: 5-year yields are below 6.5% and 2-year yields are at around 5%. Fortunately, Spain’s near-term financing schedule is not too onerous, with some 53% of this year’s planned bond sales having already been carried out.
The current level of Spanish government bond yields underlines the fact that the announced banking bailout will not address the country’s broader structural and fiscal problems. Expect pressure for a Spanish sovereign bailout to persist.
The US Fed this week decided to extend its Maturity Extension Programme (“Operation Twist”) for another six months. Yet it refrained from launching a new large-scale asset purchase programme (“QE3”). The MEP was originally due to expire at the end of June, but the Fed will now keep it up until the end of this year. The second part of the programme will be identical to the first, including the sale of approximately USD45bn per month of the Fed’s securities holdings with remaining maturities of less than 3 years and buying an offsetting value of Treasury securities with maturities of more than 6 years. The first part of the MEP involved selling/buying USD400bn over nine months between last September and this June. The latest extension will involve selling/buying USD267bn between now and the end of this year.
In its accompanying statement, the Fed again warned that “strains in global financial markets continue to pose significant downside risks to the economic outlook.” Expect the Fed to take more aggressive action – including QE3 – as soon as these risks increase further.
Leaders of the group of 20 countries met in Los Cabos, Mexico. The G20 leaders were expected to announce a mix of measures, including both deficit reduction targets for some states and further stimulus packages for others. Ultimately, the main specific announcement was an agreement to provide USD456bn in additional bilateral loans to the IMF, which would only be used as a “second line of defense” after existing resources are depleted, said IMF Managing Director Christine Lagarde. China agreed to contribute another USD43 billion to the IMF. Other emerging markets also added to the bailout fund, with Mexico, Brazil, Russia and India all pledging to contribute USD10 billion. In contrast, the US and Canada committed no additional funding.
So far, the G20 nations have done little to address the world’s underlying economic problems. With the second replenishing of the IMF’s war casket in three years falling short of the initial fundraising goal of USD 600 billion, there are lingering concerns that the firewall available may not be adequate to deal with potential contagion from the crisis.
Tags: business expectations | consensus expectations | contraction | crude oil | ecb rate | economic activity | economic conditions | expectations index | german business | german gdp | gloom | good chance | government bond | growth prospects | pmi | smi | sovereign bonds | sovereigns | spanish government | uk indices