The fourth EU Summit in the last 12 months delivered a road map for a medium term implementation of a fiscal union and a short term implementation of a banking union to contain the crisis. This is giving short term relief to markets and will lead major equity markets towards the end of week into positive territory except for Spain and Italy. Government bonds are moving sideways but face some selling pressure this morning. Gold trades above USD1560/oz. and crude oil moves around USD79/bbl.
German unemployment climbed to 6.8% in June posting the fourth consecutive monthly increase, as the number of people without jobs rose to 2.88 million according to the Federal Labour Agency.
Signs that Europe’s biggest economy is starting to feel the impact of the eurozone crisis and slowing global demand have finally arrived in the German labour market, although the level is not yet worrying. The weak euro certainly helps Germany to stay competitive with exports to non-Euro countries, so expect the German labour market to remain resilient.
Moody’s downgraded 28 Spanish banks, some by as much as four notches, following the country’s own sovereign rating cut to Baa3 from A3 on 13 June 2012. According to the credit rating agency, the downgrade followed the weakening of the Spanish government’s creditworthiness. The move is affecting the government’s ability to support its banks with high exposure to the still struggling domestic real estate market and the initiation of a review for further downgrades of the Spanish government’s Baa3 bond rating. Banco Santander is now the only Spanish bank with a creditworthiness one notch higher than the sovereign rating. This is mainly due to the high degree of geographical diversification of their balance sheet and income sources, as well as a manageable level of direct exposure to Spanish sovereign debt. All the rest of the affected banks’ standalone ratings are now at or below Spain’s Baa3 rating.
With the ties between the Spanish banking sector and the fate of the Spanish economy as a whole, not even a EUR100bn bail-out ‘ceiling’ for Spanish banks might be enough, as it will not address the country’s broader economic and fiscal problems.
Spain and Italy both conducted successful bond auctions this week. Spain sold more than planned, issuing EUR3.08bn in short-term debt, but yields on the country’s six-month bills increased from the last auction, hitting 3.237%. Italy’s Treasury first issued EUR2.99bn zero-coupon bonds at the high end of expectations and then issued another EUR5.423bn, this time in medium- and long-term debt, slightly below its maximum target for the auction. Yields on the 2017 and 2022 due bonds increased to 5.84% and 6.19%, respectively.
European banks continue to borrow cheap money from the ECB which they then invest in significantly higher-yielding sovereign bonds from some troubled eurozone countries. While this prevents the EUR sovereign bond market from drying up and yields from rising even further, it certainly does nothing to support economic growth or help businesses in need of financing.
The U.K.’s public finances further deteriorated in May as the budget deficit widened to GBP17.9bn, up from GBP15.2bn a year ago, according to the Office for National Statistics. Income receipts declined by 7.3% in May from a year ago, while expenditure surged by 7.9%, making it a hard battle for the Chancellor to meet his fiscal targets for 2012/13.
Net debt reached 65% of U.K. GDP at the end of May. Keep in mind that this figure excludes public sector net borrowing to support banks and other financial interventions, a number that might soar immediately if the eurozone crisis sparked another banking crisis.
U.S. consumer confidence fell for the fourth consecutive month in June, with the Conference Board headline index falling to 62 from 64.4 in May, its lowest level since January. It was dragged down by the fall in the expectations index to a seven-month low of 72.3 in June, from 77.3 a month ago. Meanwhile, the current conditions index, which is more susceptible to changes in labour market conditions, rebounded to 46.6 from 44.9.
The recent decline in consumer confidence is consistent with annualised consumption growth of below 1% in the second quarter, which would be a sharp slowdown from the 2.7% reported in Q1. Maybe a prolonged decline in gasoline prices can prevent confidence from slipping even further?
Tags: banco santander | bankin | bond rating | creditworthiness | downgrades | euro countries | federal labour | german unemployment | global demand | government bonds | high exposure | income sources | italy government | labour market | manageable level | sovereign debt | spanish bank | spanish banks | spanish government | term implementation