September 18 2012

In the broadcast today: USD and JPY Outlook ahead of BoJ Decision. Ahead of the Bank of Japan’s monetary policy announcement, we focus on the USD and the JPY and examine the prospects for additional quantitative easing by the Japanese central bank and its impact on the yen, we analyze the latest trend developments in the USD/JPY currency pair, we note the price correction in the EUR/USD pair, we take a look at the GBP vs. USD following the U.K. inflation report, we highlight the market’s reaction to the Reserve Bank of Australia Meeting Minutes, the U.K. CPI, and the German ZEW Economic Sentiment Index, we discuss new forecasts from Deutsche Bank and Morgan Stanley, and prepare for the trading session ahead.

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Spain Deputy PM: we’re in talks. Spanish debt sale goes smoothly- analyst reaction. Greece missing deficit/GDP target. UK inflation falls to 2.5% in August. Greek bond holders want growth plan. Troika negotiations still “difficult”…


Powered by article titled “Eurozone crisis live: Spain hints at bailout deal, as auction goes well” was written by Graeme Wearden (until 2.30) and Nick Fletcher (now), for on Tuesday 18th September 2012 14.04 UTC


Greek poll shows growing support for right wing Golden Dawn

It is three months since the Greek elections which saw a conservative
led, three party coalition being elevated to power, and the findings
of a poll marking the event makes for worrying reading, says our
correspondent Helena Smith.

The poll from Public Issue confirms what many fear most: that the neo-Nazi Golden Dawn party is on the rise and the vast majority of Greeks are opposed to the stringent austerity measures being dictated by the EU, ECB and IMF, the troika of creditors keeping the debt-stricken economy afloat.

The survey showed that some 68% of Greeks (seven in ten)
were against the terms of the latest loan agreement Athens has signed with lenders, and an overwhelming 85% anticipated being directly affected by the latest round of cuts – at nearly €12bn the focus of heated debate throughout the summer. On the back of fierce anti-bailout sentiment, the popularity of the far-right Golden Dawn had grown dramatically with the poll indicating a 10% increase in support for the party which garnered 6.9% of the vote in June.

The popularity of Golden Dawn’s rabble rousing leader, Nikos
Michaloliakos, was up 8 points from May 2012 hitting 22%, well ahead of the dogmatic communist leader Aleka Paparga. Some 88% believed Greece would see a surge in strikes and protests over the next two to three months as people hit the streets in opposition over the new austerity cuts.

Support for the euro has also dropped with 67% of respondents saying they had a “positive attitude” to the single currency compared to 72% in July and 77% in May when Greece held the first of two general elections this year.

Conservative PM Antonis Samaras saw his popularity climb with 40% of respondents saying he was “more suitable” to be prime minister than Alexis Tsipras leader of the main opposition radical left party Syriza who was given 29%. Fotis Kouvellis, who heads the small Democratic Left party, one of the three in the ruling coalition, remains the most popular political leader with 52%, followed by Alexis Tsipras with 42%, Antonis Samaras with 29%.


Wall Street follows global markets lower

Wall Street has opened and is following the downward trend we’ve seen elsewhere today.

The Dow Jones Industrial Average is around 20 points lower in early trading, ahead of more housing data due shortly.


Is the switch from bonds to equities beginning?

Despite recent dips in the past couple of days, equities have done well in the past few months, helped by the heavy dollop of money-printing in the US and other measures by central banks in the UK and Europe to try to prevent a global economic slump. With interest rates low and government bond prices high – at least, those of any government bonds worth investing in – there are few alternative places to put your money.

Louise Cooper, markets analyst at BGC Partners, wonders if we are seeing the start of a switch from bonds to equities. The answer is, probably not yet. But she thinks such a move could be on the way:

We have just experienced a 12-year bear market in equities and a 20-year-plus bull market for bonds (10-year US Treasuries peaked in 1981 with a yield of 15.8%, currently 1.8%). Equity bear markets normally last 15-20 years, and so we are approaching a turn. And bonds? At record low US, German and UK yields of 1-2%, this rally does not have much further to go. So are central banks’ actions forcing the beginning of an equity bull market and to eventually cause a bear market in credit? Is the recent strength the start of a return to equities? That is a big call, and I think it is still too early to become a big buyer of equities after such a rally and a big seller of bonds whilst economies are still moribund.

But at some stage, the big switch from bonds into equities will come and those on the right side of the trade will make their investors a lot of money, and those that are caught on the wrong side will lose a lot. If central bank actions are creating inflation in the future (as many fear) then bond investors will be brought to their knees (inflation destroys the value of bonds).

She points to evidence that such a switch may be near:

The top of any market always has telltale signs. In 1999 it was Tony Dye being fired at PDFM – the greatest value investor in a market with no value stocks left. In the same light, there are also current telling signs.

Retail investors, notorious for piling in at the top (remember technology specialist funds?) are currently big buyers of bond funds, suggesting bonds are now “toppy”.

Annuity rates so low that a pension pot running into the seven figures is required to deliver any kind of decent pension.

Equities spurned: the Weekend FT piece that suggested youngsters in their twenties are buying buy-to-let property for their retirement income rather than investing in traditional, equity-based pension schemes.

And lending to the UK government for 10 years to get back only 1.8% a year? Yeah, right.

My idea is that central bank actions are starting us on the path for this huge equity-bond switch. If the massive amounts of money currently being printed wildly across the world does lead to inflation (as many fear), that that will be devastating to holders of bonds. In the meantime, with yields so destroyed elsewhere, equities are relatively good value (despite the poor economic outlook).


It was business as usual in Athens today for the troika. The photo above shows Poul Thomsen, the head of the mission, arriving at the finance ministry for yet another meeting.

Today would have been a good time to be a fly on the ministry wall, for two reasons:

1) The admission this morning that Greece will miss its deficit targets (by some measures at least), owing to its fast-shrinking economy (latest details here, analysis here);

2) And the comments from Charles Dallara, chief negotiator for Greece’s creditors, that Athens should be given more time to hit its targets (see here).

I”m now handing over to my colleague Nick Fletcher. Thanks, all ….



Earlier today, Spain’s deputy prime minister Soraya Sáenz de Santamaría spoke about the continuing negotiations that are taking place being the scenes prior to a possible bailout.

She told the television station Telecinco Spain still demanded to know what conditions would be imposed if it applied for aid. It also wanted to find out exactly what the European Central Bank’s offer of “unlimited bond-buying” would mean in practice.

Importantly, she appeared to be suggesting that Spain could be prepared to bite the bailout bullet – if it got enough support with its borrowing cost in return.

Here’s the key quote:

If we manage to bring those borrowing costs down to acceptable levels, and that doesn’t imply an intolerable sacrifice for Spaniards, we will have to analyse it

If we get our borrowing costs to fall, so we pay less, and if we manage to do that by doing reforms and without new sacrifices [then a deal is possible].

Today’s successful bond auction (see 9.45am onwards) will probably encourage Spain to keep pushing for the best terms possible.


Finland’s Europe minister has suggested that Greece might not be given more time to achieve its fiscal targets.

Speaking in Dublin, Alexander Stubb indicated that the Finns were not convinced by Athens’s argument. He said:

We are sceptical about giving more time, especially if it means more money, but we should not exclude any options at this stage.


Never mind the eurozone crisis. What about the fiscal cliff?

That’s the message from a new survey of investors carried out by Bank of America/Merill Lynch. It found that the huge package of US tax rises and spending cuts that arrive in January 2013 were now a bigger threat than the possible implosion of the eurozone:

(Graph via the generally awesome @pawelmorski)

It’s notable how fears over the EU sovereign debt crisis have receded since August (credit to Mario Draghi). In contrast, there is no sign that US politicians are close to agreeing a deal that would postpone some of the fiscal measures (which, frankly, are needed to bring US borrowing into some kind of order).

Heidi Moore wrote about the consequences of the cliff for us last yesterday, and warned that it may already be too late to avoid some damage being caused:

But what if the question is not whether the effect of the fiscal cliff is looming over us. The question is whether it’s already here. There’s reason to believe that Congress’s delay in addressing the fiscal cliff has already had a psychological effect on corporate America.

A group of economists told the Wall Street Journal that is exactly what is happening: They blame our lackluster recovery this year on a pullback in spending and investment by US companies, which are afraid that the fallout from a fiscal cliff could compromise their ability to find funding or function normally. They’ve been preparing by essentially rolling into the fetal position in preparation.


The European Commission has approved the ‘disbursement’ of €1bn to Ireland, under its continuing financial programme.

No surprise there: at last week’s summit in Cyprus, leaders were falling over themselves to praise Dublin (Christine Lagarde called Ireland “exemplary”).


The sell-off in the financial markets continues, with the FTSE 100 now down 51 points, or 0.9%, at 5841.

In Athens, the main index is down by over 2%, driven lower by the banking sector. That follows the admission that Greece will miss its deficit targets this year (see 11.09am and earlier).



We can confirm that it was the Yannis Stournaras, the Greek finance minister himself, who earlier today broke the news that Athens’s primary deficit plan was off-track (see 9.05am)

Our correspondent Helena Smith says Stournaras made the revelation in brief comments to reporters after addressing a conference of Greek-Chinese entrepreneurs.

Although he said Athens had covered “two-thirds of its fiscal adjustment programme”, he added that its primary deficit stood to reach 1.5% of GDP compared with the projected 1% by the end of 2012 because of a much worse than expected recession, forecast to reach 25% by 2014.

Stournaras said:

Negotiations with the troika are difficult, just as the measures are difficult. We are working night and day, and we hope that in October decisions will be taken that will allow us to look fixedly at the future with optimism, leaving behind the mistakes of the past … At last, there is light at the end of the tunnel.

However the economics professor emphasised that Greece lagged behind in applying “corrective” reforms, saying there was a need to accelerate privatisations, the campaign against tax evasion and other structural changes.


German investor confidence has risen for the first time in five months, according to the ZEW survey of analyst and investor sentiment.

The ZEW index came in at -18.2 this month: not a great number, but a definite improvement on August’s -25.5.

Economists say this shows that the business world has been cheered by the European Central Bank’s pledge to help drive down the borrowing costs of countries that apply for financial help.


Back to Greece, and today’s warning that the Greek economy will have shrunk by 25% by the end of 2014. (see 9.05am)

Our correspondent, Helena Smith, reminds me that the economy was due this year to shrink by less than 4% but now looks much more likely to contract by 7% or more.

Helena writes:

This is precisely because the austerity-driven recession in which the debt-stricken country is mired is much worse than envisaged. By being the ‘good pupil’, and applying deficit-reducing measures demanded by international lenders, Greece has not only failed to improve its competitiveness but increasingly found itself much worse off.

Unemployment, by far the biggest problem, has hit almost 25%, with a whopping 54% of the nation’s youth (the highest in Europe) out of work.

Critics of the troika’s fiscal recovery methods have hit out at the “rescuers” for their “home economics”, saying that the policies should not be applied to a country. Now (as mentioned at 08:37am) the IIF (Institute of International Finance) chief, Charles Dallara, not one to whip the establishment, has also hit out at the troika’s fiscal remedies, saying more emphasis should have been placed on strengthening competitiveness.

Interestingly, the new package of spending cuts Greece has been called upon to apply in return for its next tranche of aid (€31.5bn, which is vital to inject some liquidity into the cash-starved real economy) keeps going up. The media, reflecting different announcements from Greek officials, now estimate the total package to be worth €11.9bn compared with the €11.5bn at which it initially started. This partly explains why negotiations over the cuts have been so tortuous: with the target always moving, the cuts are never enough.

Helena adds that the troika officials in Athens are insisting that between €7bn and €8b of the package must come from cuts in wages and pensions:

That is certain to elicit a fierce backlash, given that low-income Greeks have carried the brunt of the austerity inflicted on the country so far. The three-party coalition government is believed to have decided that it will agree to a raise in the retirement age, from 65 to 67 – a measure that is expected to save the state some … a total of €2bn.

The Greek finance minister, Yiannis Stournaras, has made clear that the deadline for the measures will have to be Sunday, to enable the EU, ECB and IMF to have enough time to consider a range of growth and support measures that Greece needs. Stournaras wants decisions to be made at the next meeting of euro group finance minister, on 8 October, and approved at the next EU summit (the first attended by Greek prime minister Antonis Samaras), on 18 October.



Here is some expert reaction to this morning’s Spanish bond sale:

Nick Spiro of Spiro Sovereign Strategy

Spanish debt auctions have an increasingly artificial feel to them as the markets, Spain and the ECB are all playing chicken with each other. Yet the fact remains that the Treasury managed to get all its debt out the door this morning, demand was solid, if unspectacular, and yields continued to fall.

Although investors are starting to lose patience with Spain, they don’t want to throw in the towel for fear of missing out on a possible bond-buying-driven rally. It’s a bizarre standoff, to say the least.

Jeremy Cook of World First

A good auction from Spain will only add to the political belief that immediate action is not needed. Politicians will remain reactive.


This morning’s Spanish bond auction (results at 9.45am) has brought some relief to the City, with the yield on Spain’s 10-year bond nipping back below 6%.

That reflects the drop in borrowing costs, and the fact that the auction was comfortably oversubscribed.



Some good news for Spain.

The results of its debt auction are in, and Madrid has successfully raised €4.6bn (£3.7bn). That’s above its top target.

Investors also agreed to accept lower interest rates in return for lending to Spain.

The yield on the 12-month bonds sold today came in at 2.835%, down from 3.07%. The 18-month bonds were sold for an average yield of 3.072%, against 3.3% last time.

There was also decent demand for Spanish debt. Spain received bids for twice as much 12-month debt as it sold, and 3.6 times as much of the 18-month debt.

Reaction to follow


UK inflation drops

Just in: UK inflation dropped to 2.5% in August, as measured by the consumer prices index. That’s in line with forecasts, down from 2.6% last month.

UPDATE: our full story is now online here.


The Bank of Spain has just reported a rise in bad bank loans to a new, record high.

A total of 9.86% of loans made by Spanish banks are now in arrears, up from 9.42% in June.

Spanish banks’ balance sheets have turned increasingly toxic since the financial crisis began, mainly owing to borrowings made in the property boom.



Some alarming flashes are hitting the wires from Greece, with a government minister predicting that the Greek economy will have shrunk by a quarter before the crisis is over.

A Greek finance minister (presumably Yannis Stournaras, but we’ll check) is saying that Greece’s primary deficit will be worse than forecast – at 1.5% of GDP, from a previous target of 1%.

The minister is arguing that Greece will hit its deficit targets in “nominal terms”, but not as as percentage of GDP. In other words: Athens won’t borrow more than planned, but the borrowing will be a larger share of the economy.

And that’s because the Greek economy has shrunk by more than previously expected. The minister is explaining that the Greek economy will have contracted by 25% by 2014, from its size when the crisis began.


More signs of jitters over Spain: the cost of insuring its debt against default has risen (by 7 basis points to 374bp), and the yield on its two-year bonds has risen to 3.45% (from 3.4% last night).

Not huge moves, but the numbers are moving the wrong way, from Spain’s point of view.

This morning’s auction of 12- and 18- month bills should be over soon. Spain was looking to sell between €3.5bn (£2.8bn) and €4.5bn, so it will be interesting to see how much it sells, and at what cost …


The man who represents Greece’s creditors has criticised the country’s financial programme for failing to focus on growth measures.

Charles Dallara, managing director of the Institute of International Finance (IIF), told reporters in Beijing that Greece needs more support if it is to recover.

Dallara, who negotiated Greece’s private sector “haircut” before its second bailout, said:

There has been too much emphasis on short-term austerity and too little emphasis on medium-term measures to strengthen competitiveness …

This is very much what the Greek PM, Antonis Samaras, has been warning for weeks. So it is significant that Dallara agrees. Private investors took big losses on their Greek bonds during March’s writedown; they clearly don’t want a repeat.



Financial markets in Europe have dropped at the start of trading:

FTSE 100 index: down 34 points at 5858, – 0.6%

German DAX: down 49 points at 7354, -0.8%

French CAC: down 23 points at 3530, – 0.66%

Spanish IBEX: down 50 points at 8097, – 0.6%

Italian FTSE MIB: down 95 points at 16375, – 0.6%

Spain isn’t the only reason. Traders say the row between EU leaders over banking supervision is another factor, along with general unease over the global economy.

Andrew Taylor at GFT Markets explains that the ECB’s bond-buying plan, and the US Federal Reserve’s QE3, have only bought time for political leaders to tackle Europe’s banking and fiscal integration issues, and the looming US “fiscal cliff”:

We are already starting to see cracks emerge as France and Germany remain staunch in opposition on the banking union details, proving it will be a long road ahead.



Here’s what’s coming up today:

Spain auctions 12- and 18-month bonds: from 9am BST/10am CEST

UK inflation data: 9.30am BST

German ZEW investor confidence index: 10am

Greece auctions 13-week bills: morning


Spanish debt sale looms

Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Today we’re focusing on Spain, again. The question of whether the Spanish government will seek financial support continues to buzz around the trading floors and corridors of power.

An auction of short-term debt, taking place this morning, will show whether investors still trust Madrid. Spain is selling 12- and 18-month bills, shortly after 9am BST (an auction of longer-term debt is due on Thursday).

Spanish sovereign debt has certainly been hit by the uncertainty, with the yield on 10-year bonds trading above 6% this morning. The have lost almost the gains made after Mario Draghi threw the European Central Bank’s balance sheet into play in an attempt to stop the crisis.

But last weekend’s protests show the anger of many people in Spain about the current austerity programme. Can they really accept new conditions being imposed by international lenders?

Spain’s prime minister, Mariano Rajoy finds himself trapped between the increasingly impatient financial markets and growing public fury at home.

As Reuters’s Ben White put it last night:

Economic reality appears to be limiting the amount of time Rajoy has for consideration.

Spanish banks, meanwhile, are losing deposits at an alarming rate, with a record €26bn withdrawn in July alone. That leaves the country’s already shaky financial institutions with worsening loan-to-deposit ratios and a clear deficit of public trust. Catalonia, Spain’s wealthiest region, isn’t happy with the amount of taxes it is shipping to Madrid and wants its ‘own project’, separate from the current path of the rest of the country …

Also coming up today: the monthly ZEW survey of German investor sentiment is due out, while UK inflation data will show how the cost of living changed in August. © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Spain Deputy PM: we’re in talks. Spanish debt sale goes smoothly- analyst reaction. Greece missing deficit/GDP target. UK inflation falls to 2.5% in August. Greek bond holders want growth plan. Troika negotiations still “difficult”…