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Posted on: 27 Jul 2012 by James Farmer

It’s been a predominantly negative week for global equity markets. The Eurozone crisis has accelerated again, with serious concerns around Greece, Spain and Italy.

Spain again grabbed the headlines as politicians skirted around the possible requirement of a full sovereign debt bail out. However, the sell-off ended late on Thursday after the European Central Bank (ECB) president Mario Draghi pledged it would do “whatever it takes to preserve the euro”. This was enough to help bank stocks rally and also helped push Spanish ten-year bond yields back down below the psychologically crucial 7.0% mark. Investors are nervous but markets are not quite ready to capitulate. This seems driven by the belief that central banks will step in when required.

That belief looks likely to keep providing shaky support, in the short-term at least. In Spain speculation was fuelled by concerns around approaches from the regional states (particularly Valencia) for assistance from Madrid. Ten-year sovereign debt yields hit record highs whilst yields on shorter term debt also continue to rise. The yield curve is in danger of flattening. Italy is also in the firing line and investors fear that the current policies and firewalls in place are not going to be enough if Spain, Italy or both countries are shut out from the credit markets. The announcement of short selling bans this week in both Italy and Spain only helped to exacerbate investor fears.

As for Greece, its next tranche of refinancing is approaching and an assessment is being made on how well it is coping with its deficit reduction targets. It is a long way off meeting those targets and there are few words of solace being proffered from Germany, the ECB, European Union (EU) and the IMF. If Greece fails to convince and doesn’t qualify for the next tranche of bailout it will technically be bankrupt. A default and ‘Grexit’ is back within the realms of possibility. The ‘big bazooka’ from policy makers may be required soon. A clear strategy for the future of the Eurozone would also be welcome, although some form of continued muddling through remains the most likely outcome.

Closer to home, second quarter GDP forecasts for the UK not only left a bitter taste in the mouth but were also hard to swallow. The UK economy suffered a sharp contraction during Q2, with output falling 0.7%, much greater than the 0.2% economists had been predicting. This makes it three negative quarters in a row, with plenty of recriminations for “No Plan B” Chancellor George Osborne. However, the messages are somewhat mixed as employment in the UK is rising. It is also worth bearing in mind that these are preliminary reports and are liable to revision. There is, therefore, plenty of opportunity for debate but the UK’s highly prized AAA status is likely to come under pressure again. 

 

 

Tags: bailout | bank stocks | bazooka | bond yields | central banks | credit markets | deficit reduction | eurozone | firing line | global equity markets | investor fears | mario draghi | record highs | reduction targets | regional states | serious concerns | solace | sovereign debt | tranche | yield curve