More pain for Spain, more pain for Eurozone
Spanish Premier Mariano Rajoy will face increasing pressure to seek European aid as economic activity in Spain shrank for the fifth consecutive quarter. GDP fell by 0.4% in the third quarter, matching the decline seen in Q2. Further pressure will follow as Moody’s cut the credit rating on five Spanish regions, a week after cutting Spain’s credit rating to below investment grade. Despite these downbeat developments, Spain managed to exceed its target in the latest bond auction, selling €3.53bn short-term debt yesterday.
The eurozone’s troubles continue. On one side German Finance Minister Schauble suggests that we may not have seen the worst of the Euro-crisis, while on the other hand German paper SZ (quoting an unnamed source) claimed EU officials had agreed to give Greece an extra two years (2016) to meet government budget deficit targets. While market sceptics are still plentiful and optimists few, the intention is to bring the country’s budget deficit down to 3% of GDP.
Eurozone businesses in October suffered their worst month since the bloc emerged from its last recession more than three years ago, forcing them to cut more jobs to reduce costs, Markit’s Composite Purchasing Managers’ Index (PMI), showed. The PMI fell to 45.8 this month from a September reading of 46.1. The index has now been below the 50 mark that separates growth from contraction since February. The eurozone economy contracted 0.2% in the second quarter and is predicted to have shrunk 0.3% in the third, meeting the technical definition of a recession.
On a slightly more positive note, eurozone consumer confidence improved marginally in October. The index moved up to -25.6 from -25.9 in September. Consumer spending makes up more than half of the eurozone’s economic output, but with disposable income under pressure, households are in no position to help the economy recover.
Back home, UK households and businesses have little appetite to take on new debt while the economic outlook remains uncertain. Mortgage approvals were up slightly on last month at 31,175 but are still down 6% compared to a year ago. Unsecured borrowing through loans and overdrafts dropped by 7.7% in the year to September.
GBP’s story today has revolved around the USD and the EUR, as the Spanish issues dominated the European morning, prompting selling in the EUR and its related currencies. Despite EUR/GBP’s weakness, the USD-strength has forced the pair lower, in line with HSBC’s new recommendation to clients on shorting, with a target of 1.5600. Looking ahead in the pair, all eyes are on the flash estimate for Q3 GDP for the medium-term picture, and beyond that November’s rate decision from the Bank of England.
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