USD and EUR concerns
Yesterday saw sovereign debt return to the market, in both the Euro zone and the US. The S&P revised its long-term outlook on US debt from stable to negative citing, the lack of a plan in addressing the very large budget deficit means that the US is in a significantly weaker position than its ‘AAA’ peers. So why has the Dollar strengthened against both Sterling and the Euro? The fall against Sterling I can only presume is due to risk returning to the markets and the dollar is still considered to be a safe haven.
The Euro’s decline against Sterling and the Dollar is a little easier to explain: It may follow increased worries about Greek debt restructuring, an increased share of the vote for the Euro-sceptic party in Finland and increasing yields on Spanish debt auctions.
The most worrying of these headlines is the increasing yield on Spanish debt. The interest rate now demanded by investors to hold Spanish bonds yesterday hit its highest level in more than a decade. It only seems a short while ago that we were being told that Spain had separated itself from the other ‘PIIGS’ and was now safe from contagion fears.
In my opinion Spain’s attempt to cut the deficit is impressive, having slashed public sector wages, increased taxes and increased the retirement age to 67. However, Spanish growth is flat and the country has the highest unemployment rate in the Euro zone, meaning that these tough austerity measures are even harder to implement. To add to this, the Euro has rapidly increased in value since early February and, as a consequence, Spain’s chances of exporting its way to recovery have been harmed. This Wednesday’s larger bond auction in Spain will be watched for any signs of possible weakness for Europe’s fourth largest economy.
Today is another quiet day for data releases in the UK; the main data release will be coming tomorrow with the release of the MPC minutes which should provide a clearer idea regarding the chance of what now looks like a very surprising rate hike in May.