MacroScope

Just a typical euro zone day

By Mike Peacock
July 16, 2013

Spain will sell up to four billion euros of six- and 12-month treasury bills, prior to a full bond auction on Thursday. Italy attracted only anaemic demand at auction last week and Madrid has already had to pay more to borrow since the Federal Reserve shook up the markets with its blueprint for an exit from QE.

However, yields are nothing like back to the danger levels of last year and both countries have frontloaded their funding this year. Economy Minister Luis de Guindos, who declared over the weekend that the Spanish economy will grow in the second half of the year, speaks later in the day.

The political backdrop is also shaky, and getting shakier by the day, although that doesn’t always infect market sentiment. Prime Minister Mariano Rajoy rejected calls to resign on Monday over a party financing scandal and said his reform programme would continue unaffected.

Easier said than done given the former treasurer of his centre-right People’s Party gave new testimony, saying he had made 90,000 euros in cash payments to Rajoy and a senior party official in 2009 and 2010. The betting, for now, is that Rajoy will survive, partly because of the weakness of his opposition. But popular support for his ruling party is leaching away.

It looks like a typical euro zone day. Greek labour unions are striking over public sector cuts and there’s been another downgrade – this time by Fitch of the European Financial Stability Facility, the bloc’s first rescue fund – following France’s loss of its ‘AAA’ status on Friday.

As Portugal’s politicians struggle to build a new coalition to pursue its bailout programme, the central bank will publish its summer economic bulletin. In March, it revised down its GDP forecasts and it could do so again after it warned of downward risks from dwindling external demand. The political stalemate won’t help either.

To recap, the government was rocked by the resignation of its finance and foreign ministers in successive days. The prime minister righted the listing ship by making the foreign minister his deputy and putting him in charge of negotiating with the EU and IMF only for the president to scupper the deal and insist a grander coalition including the anti-austerity, opposition Socialists was required. The parties have collectively set a July 21 deadline to agree a “national salvation pact”.

The odds are shifting towards Lisbon failing to quit its bailout programme as planned next year and needing further help for longer.

The Bank of Italy will publish its latest debt and public finance figures while Prime Minister Enrico Letta heads to London to deliver a speech tonight and talk with Britain’s David Cameron tomorrow. His fractious government  is struggling to agree on an economic reform package with Silvio Berlusconi’s centre-right still demanding the abolition of a housing tax which would put a further hole in the public finances.

If that was not enough, IMF chief Christine Lagarde will make a speech in Bucharest as she wends her way towards Moscow for the end-of-week G20 summit. And Cypriot Finance Minister Haris Georgiades holds a news conference a day before the country’s EU/IMF lenders arrive for their first review of its bailout.

Germany’s ZEW sentiment index for July is the big number of the day and is forecast to edge up. European stock futures are pointing upwards, anticipating a further improvement in German confidence. German Bund futures opened flat, waiting for the same figure.

For U.S. data, bad news remains good news. Weakish retail sales figures yesterday supported the view that the Federal Reserve will not pull the plug on its bond-buying soon (although whether there is any logic to reacting to one economic statistic in that way is highly arguable).
Fed Chairman Ben Bernanke gets another chance to tweak the markets with two days of testimony to Congress, starting tomorrow. He is the proverbial elephant in the room.

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