July 12 2013

Portugal’s political crisis raises the odds of a second bailout and knocks bonds. Ratings agency upgrades Ireland outlook. Stock markets rally. UK construction flatlines. Eurozone industry output disappoints. ECB reassures on rates again…


Powered by Guardian.co.ukThis article titled “Eurozone crisis as it happened: Portugal’s political crisis deepens” was written by Katie Allen, for theguardian.com on Friday 12th July 2013 16.19 UTC

5.19pm BST

European markets unsettled by Portugal

Stock markets have closed in Europe and it has been a fairly mixed performance, writes Nick Fletcher. After a brightish start, some of the shine has come off, as investors began to fret about the current political uncertainty in Portugal. So at the close:

• The FTSE 100 edged up 1.53 points or 0.02% to 6544.94

• Germany's Dax is up 0.66% at 8212.77

• France's Cac closed down 0.36% at 3855.09

• Italy's FTSE MIB was 1.57% lower at 15,430

• Spain's Ibex finished 2.32% down at 7844.7

• Portugal's PSI 20 fell 1.09% to 5364 while its 10 year yields are at 7.5%

• The Athens market lost 0.9% to 804

On Wall Street, the Dow Jones Industrial Average edged down 7 points or 0.05% in early trading.

On that note it's time to close for the evening. Thanks for all your comments, have a good weekend and we'll be back on Monday.

4.24pm BST

Risk of second bailout?

Staying with Portugal, a last bit of analysis on the situation there, where to sum up main events:

• Lisbon has asked the troika of international lenders for a delay to the next review of Portugal's bailout programme because of the political crisis. It was initially due to start on Monday, the request is for it to be moved to the end of August or early September

• Bond yields have risen sharply

• The opposition Socialists have demanded a renegotiation of Portugal's bailout terms 

• President Anibal Cavaco Silva has demanded (earlier this week) a cross-party agreement to last until the end of the bailout programme in June 2014

Jennifer McKeown at Capital Economics has this assessment of events:

The risk of the Portuguese Government needing a second bail-out is growing by the day. President Aníbal Cavaco Silva’s recent insistence that the shaky government reach an agreement with the opposition Socialists to ensure the “governability of the country” has added to markets’ concerns. (While the President has wide-reaching powers in theory, in practice he rarely intervenes.)

The Socialists are against the Government’s austerity plans and have called for a renegotiation of Portugal’s bail-out terms. The situation has forced Lisbon to delay the Troika’s review of its progress, initially scheduled to start on Monday, until September and prompted 10-year bond yields to rise towards 8%.

If Portugal does request another bail-out, there will be two key questions: will the German Parliament agree to provide more money with a general election imminent at home? And, if a bail-out is agreed, will the ECB then implement OMTs to match the hype that their announcement generated? There is a big risk that the answer to at least one of these questions is “no”, suggesting that a Portuguese debt restructuring remains a very real threat.

4.08pm BST

A tale of two bailout bond yields

Back to Portugal now, where bond yields continue to rise on the back of the political crisis and Lisbon's related request to the troika of creditors to delay the next review of its progress on meeting bailout conditions.

Portuguese 10-year yields are up 67 basis points on the day to 7.65%. Irish yields, boosted by S&P's upgrade to its outlook for Ireland's credit rating, are headed the other way. On 10-year bonds they are down 5 basis points to 3.9%. That leaves the spread between the two at 374 basis points.

On the CDS market, plenty of drama too:

3.23pm BST

Behind the scenes at the BoE

Mark Carney, governor of the Bank Of England, inside the central bank's headquarters. The Bank is open to visitors on Saturday as part of the City of London festival.
Mark Carney, governor of the Bank Of England, inside the central bank’s headquarters. The Bank is open to visitors on Saturday as part of the City of London festival. Photograph: Pool/Getty Images

A quick heads up for central bank followers who happen to be in London tomorrow that there will be a rare chance to see inside the Bank of England as part of the City of London festival.

Tthe Bank and its Museum will be open to visitors on Saturday and museum staff will be conducting 30 minute guided tours of parts of the Bank.

No word on whether new man Mark Carney will be staffing any festival cake stands…

3.08pm BST

US economic recovery jitters

More now on that Thomson Reuters/University of Michigan consumer sentiment survey: The drop in the headline index to a weaker-than-expected 83.9 comes as the index on current economic situation rose to a six-year high of 99.7 but that was offset by a decline in the consumer expectations gauge.

3.00pm BST

US consumer sentiment unexpectedly weakens

Consumer sentiment in the US this month is weaker than most economists had been expecting, according to the preliminary reading on the Thomson Reuters/University of Michigan consumer sentiment survey.

The headline index came in at 83.9, confounding expectations for it to rise to 85 from June's 84.1.

2.42pm BST

Portugal market fallout continues

As Gavan Nolan at data specialists Markit says here, the political crisis in Portugal continues to move the credit markets. News that Lisbon has delayed a review from its international lenders has further shaken faith in the country's ability to meet fiscal targets and seen Portuguese government bonds underperform today.

Yields on 10-year Portuguese bonds are a hefty 90 basis points higher at 7.9%. That contrasts with a drop of 7 basis points to 1.55% for 10-year Bunds.

2.06pm BST

Germany’s Schaeuble tells European Commission to back off on banks

News now from Berlin, where Reuters has got hold of a letter from German finance minister Wolfgang Schaeuble telling the European Commission it is trying to have too much power with its proposals on how to salvage or shut failing eurozone banks.

Reuters reports:

Schaeuble wrote in his letter to Michel Barnier, Commissioner for Internal Market and Services, that the proposal for the Commission to make the final decision on whether to wind down banks was out of step with European Union law.

"The proposal published by the Commission regrettably envisages too high a degree of centralisation with regard to the boundaries of the existing (EU) law," reads the letter, which was seen by Reuters on Friday and is dated July 11.

"The proposal does not match the current legal, political and economic realities and would create major risks," Schaeuble wrote, adding that the transfer of powers to the Commission was not backed by EU treaties.

The Commission on Wednesday presented plans for an agency to salvage or shut troubled banks, in which it would call the final shot. This would be the second of three pillars of the 'banking union' meant to galvanise the response to the euro zone crisis.


Schaeuble has long argued that an EU Treaty change is necessary before a resolution agency could get executive clout. He reiterated in the letter that Germany wanted a two-step approach to get there.

The first stage should build on national resolution authorities taking coordinated decisions, with a board at the central level to "ensure quick, effective and coherent decision-making", Schaeuble wrote.

"This approach would not exclude the Commission. To the contrary, I advocate a decisive role for (the Commission) to rigorously apply the State Aid rules as minimum standards, and to protect taxpayers' interests," read the letter.

Phase two would require a treaty revision and a more centralised solution, Schaeuble wrote.

12.43pm BST

Reactions to Portugal crisis

Porutgal's main opposition Socialists are saying they want to renegotiate the terms of the country's bailout.

Speaking in parliament, leader Antonio Jose Seguro says:

It is necessary to renegotiate our programme, to gain more time.

Some reactions on Twitter to the latest developments in the country's political crisis:

12.26pm BST

China seen posting slower growth

Chinese finance minister Lou Jiwei has reportedly suggested growth could be lower than previously expected.
Chinese finance minister Lou Jiwei has reportedly suggested growth could be lower than previously expected. Photograph: BRENDAN SMIALOWSKI/AFP/Getty Images

A look ahead to the weekend briefly now, when China is due to report its latest GDP figures. Remarks from the country’s finance minister have fuelled expectations they will show growth has slowed in recent months.

Speaking in Washington, Lou Jiwei said growth could be 7% this year, the official Xinhua news agency reported. That would mean growth coming in below the government’s official target for the first time in living memory.
Lou said economic growth in the first half of the year would be “slightly lower than 7.7%”.

“There is no doubt that China can achieve the growth target, though the 7 percent goal should not be considered as the bottom line,” Xinhua reported in paraphrasing Lou’s remarks.

Economists polled by Reuters forecast second quarter GDP will post annual growth of 7.5%, down from 7.7% in the first quarter.

Societe Generale is forecasting growth of 7.4% in the second quarter.
Economist Wei Yao at Societe Generale comments:

“Industrial production and fixed asset investment likely continued to decelerate in June as well. Retail sales growth may be the only exception, albeit just in nominal terms. In our view, the chance of upside surprises from the upcoming data release is fairly limited. Also we don’t think policymakers will substantially ease their tough love stance in response to the data.”

11.42am BST

Portugal PM vows to solve political crisis

Portuguese Prime Minister Pedro Passos Coelho has vowed to resolve the political crisis.
Portuguese Prime Minister Pedro Passos Coelho has vowed to resolve the political crisis. Photograph: MANUEL DE ALMEIDA/EPA

More details on the situation in Portugal now where the political crisis continues and threatens to derail the country's smooth exit from its bailout next year.

Reuters reports from Lisbon this morning that Prime Minister Pedro Passos Coelho says he is ready to overcome differences with his coalition partner and the opposition Socialists to resolve the crisis as requested by the country's president.

The report continues:

"The president's words must be heard…let us reach a deal that matches everyone's wish, which is to conclude successfully the adjustment program by June 2014," he told parliament.

"The complexity of our situation forces all political agents, including the government, to cultivate democratic unity and political realism," the premier added.

President Anibal Cavaco Silva threw the country into disarray this week by rejecting the premier's bid to heal the coalition rift via a cabinet reshuffle, lighting the fuse on what critics called a "time bomb" by calling for early elections next year.

"What happened should not have happened, and we have to show that it will not happen again," Passos Coelho said, adding that the government is still in office and fulfilling its duties.

Socialist leader Antonio Jose Seguro also told parliament that his party is ready to contribute to solutions for the country, but reaffirmed it would not join the current center-right coalition government.

"The government's days are numbered," he said.

11.13am BST

Portugal’s political crisis knocks bonds

In Portugal, government bonds are underperforming their equivalents throughout the rest of Europe after the bailed-out country asked to delay the next review by its international creditors.

Yields on Portuguese two-year bonds are up 19 basis points at 5.96%, yields on 10-year bonds are up 12 basis points at 7.1%. In contrast, yields on 10-year Bunds in Germany are down 4.5 basis points at 1.57%. Following S&P's comments on Ireland (reported here at 9.43am), yields on 10-year Irish bonds are down 13 basis points 3.83%.

10.40am BST

Industry seen on track to help overall eurozone growth

Martin van Vliet of ING says the drop in eurozone industrial production (covered here at 10.18am) "confirms that the Eurozone economy is still struggling to return to growth." But he continues:

Nonetheless, industry remains on track to make a positive contribution to Q2 GDP. Indeed, if industrial output were to remain unchanged in June, it would still expand by 0.9.% in Q2 as a whole, adding around 0.2 ppt to GDP growth. This, coupled with a weather-related rebound in construction in some Eurozone countries, may mean that a negative GDP reading could have been avoided.

Looking ahead, the scope for further output recovery in the industrial sector in the remainder of this year appears limited. The hiccup in global growth due to the slowdown in China and the rise in bond yields means that external demand for industrial goods may not strengthen much. Moreover, with fiscal policy set to remain tight in many eurozone countries, domestic demand is unlikely to rise sharply either. The best we can realistically hope for is that industrial production will be on a gradual upward trend over the next six to 12 months. Against this backdrop, we suspect that ECB interest rates will indeed have to remain low for an extended period.

10.29am BST

ECB has more words of comfort

European Central Bank (ECB) Vice President Vitor Constancio has implied monetary policy will remain loose.
European Central Bank (ECB) Vice President Vitor Constancio has implied monetary policy will remain loose. Photograph: RALPH ORLOWSKI/Reuters

Continuing this week's theme of calming market fears with words of comfort — of the loose monetary policy kind — another ECB official has been reassuring on rates.

Speaking in Singapore, ECB cice-president Vitor Constancio said that with the eurozone likely to see an extended period of slow economic growth, ECB policy will have to stay loose for a long time.

He also criticised the European Commission's proposal for shutting down failing banks, saying that the planned authority should be given access to a public credit line.

The full text of his speech is here. Highlights include:

Europe is behind the US in economic recovery and inflation risks which implies that monetary policy has to stay accommodative for a longer period of time.

Advanced economies, Europe in particular, face a long period of slow growth that will test the quality of our institutions. The European social compact will have to prove its adaptability and resilience. The Euro Area is still facing a painful crisis of imbalances, financial fragmentation and low growth. Questions of excess inequalities and high unemployment will have to be addressed.

As someone said, “a crisis is a terrible thing to waste” – and we are using this crisis to build a stronger and more stable monetary union that will play a constructive part in global rebalancing.

10.18am BST

Eurozone industrial output slips in May

Industrial output in the eurozone has come in largely as expected, slipping 0.3% in May from April.

In annual terms, output fell 1.3%, according to data from Eurostat.

There was some mildly positive news in revisions to previous data, with output now believed to have expanded 0.5% on the month in April, compared with a previous reading of 0.4%.

Further details from Eurostat also bring some welcome cheer for Portugal, which tops the industrial growth league in May. Eurostat reports:

Among the European Union member states for which data are available, industrial production fell in thirteen, rose in nine and remained stable in the UK. The largest decreases were registered in Romania (-10.7%), Lithuania
(-6.3%) and Sweden (-3.8%), and the highest increases in Portugal (+6.1%), Latvia (+2.2%) and Estonia (+2.0%).

Looking at the drivers of production throughout the eurozone, Eurostat says:

In May 2013 compared with April 2013, production of durable consumer goods dropped by 2.3% in the euro area. Capital goods decreased by 1.5%. Energy rose by 0.1%. Intermediate goods grew by 0.4%. Non-durable consumer goods increased by 0.6%.

Eurozone industrial production
Eurozone industrial production slipped in May. Photograph: /Eurostat

10.06am BST

Construction could still help UK growth over the second quarter

Howard Archer, chief UK and European economist at IHS Global Insight thinks that despite the flat reading for construction output in May, the sector may well have boosted the overall economy in the second quarter. He send through this reaction to the UK data (covered here at 9.58am):

It looks highly likely that construction output made a recently all-too rare positive contribution to GDP growth in the second quarter, thereby helping growth to strengthen and broaden from the first quarter when GDP rose 0.3% quarter-on-quarter. We currently estimate that GDP expanded 0.6% quarter-on-quarter in the second quarter.

Indeed, even if construction output was only flat month-on-month in June, it would have still expanded by 2.2% quarter-on-quarter in the second quarter. This would translate into a positive contribution of 0.15 percentage point to quarter-on-quarter GDP. And latest survey evidence from the purchasing managers suggests that construction output expanded modestly in June.

9.58am BST

No growth for construction brings more caution to UK

Britain's construction sector flatlined in May, according to official figures just out that will add a further note of caution to forecasts for overall growth to accelerate.

The Office for National Statistics reports in its Output in the Construction Industry report for May – the first one to provide seasonally adjusted monthly figures – that there was no growth from April.

The highlights are:

  • The estimated monthly seasonally adjusted, total volume of construction output in May 2013 was 4.8% lower than in May 2012
  • Comparing the three months from March 2013 to May 2013 with the same three months a year earlier, the volume of construction output decreased by 4.8%
  • Comparing May 2013 with April 2013, the seasonally adjusted total volume of construction output showed zero growth. There was a small increase in all new work of 0.3%, which was negated by a decline in repair & maintenance output of 0.5%.
Construction output in the UK
Construction output since 2005. Photograph: /ONS

9.43am BST

Ireland has 1-in-3 chance of upgrade of credit rating, says S&P

More details on the move by credit ratings agency, Standard & Poor's, to upgrade its outlook on Ireland's credit rating.

The upgrade to "positive" from "stable" on Ireland's BBB-plus rating comes ahead of a planned year-end exit from its EU/IMF bailout.

S&P says in a statement:

The outlook revision reflects our view that Ireland's general government debt burden is likely to decline more rapidly, as a percentage of GDP, than we had previously expected.

Ireland's economic recovery is under way.

S&P said it saw a more than one-in-three probability it would raise Ireland's credit rating during the next two years, citing expectations that national debt will fall from 122% of GDP in 2013 to 112% by 2016.

Reacting to the news, Philip O'Sullivan, chief economist at NCB Stockbrokers, said it will fuel expectations that Moody's, the only major rating agency that rates Irish sovereign debt as non- investment grade, will also take a more positive stance on Ireland. He told Reuters:

When you look at some of the cliff-hangers we have had in the rest of the periphery, Ireland has kept its head down and got on with it and I think that has been recognised.

What S&P has done today illustrates the widening gap between the Moody's stance and how many others on the market view the country. We see a Moody's upgrade as a question of when, not if.

9.19am BST

US consumer sentiment seen improving

While we are previewing data, there could be a further boost for US stocks today after Thursday's record highs if news there on consumer sentiment comes in as strongly as most economists expect.

The main data awaited in the US today is the preliminary reading on the Thomson Reuters/University of Michigan consumer sentiment survey. The final reading for June at 84.1 points suggested sentiment was close to a six-year high set in May. The consensus forecast is for 85 today, according to a Reuters poll of economists.

Capital Economics is forecasting a reading of 86 points. Economists at the thinktank say:

Despite the drop back in some of the more timely consumer confidence indices in early July, we think there is some scope for the University of Michigan measure to rise a bit.

After dropping by nearly 2% in the month of June as a whole, equity prices started to recover in early July. Gasoline prices began to trend downwards again, falling close to .60 a gallon. And the housing market is also progressing well, which we suspect may have started to play a bigger part in boosting consumers’ moods.

That said, labour market conditions are still improving only gradually and the more timely daily Gallup and monthly RBC measures of sentiment fell slightly in July.

9.11am BST

Construction clues awaited for UK

A quick preview now of the main data coming up shortly in the UK.

Construction figures at 9.30am should give further fuel to the debate over what the economy did over the second quarter after the tepid growth of 0.3% in the first quarter. Official figures on Tuesday showed the manufacturing sector shrunk in May, bringing to an end the recent run of stronger-than-expected indicators on the UK. It was a timely reminder of the challenges that remain for the economy and cast doubt over some of the more punchy forecasts for GDP growth in the second quarter – some of which were as high as 0.8%.

The construction data are erratic so analysts are reluctant to forecast further progress in May on April’s brighter picture. That previous month’s data showed the smallest annual fall – 1.1% – in well over a year, raising hopes construction may well have contributed to overall economic growth in the second quarter.

Alan Clarke, economist at Scotiabank in London says today’s construction numbers could “ruin the mood music” on Britain’s recovery:

Construction output data is a random number generator at the best of times. That was incredibly robust in April, so it will be crucial to see if there was any payback in May. Even so, as things stand the least we should see for Q2 GDP is 0.5% q/q. Our base case is 0.75% q/q.

9.01am BST

The day's final numbers are shown on an information board above the floor of the New York Stock Exchange shortly before the closing of the market in New York, July 11, 2013. The S&P 500 index and the Dow industrials closed on Thursday at record highs.
The day’s final numbers are shown on an information board above the floor of the New York Stock Exchange shortly before the closing of the market in New York, July 11, 2013. The S&P 500 index and the Dow industrials closed on Thursday at record highs. Photograph: LUCAS JACKSON/REUTERS

9.01am BST

Taper tantrum gives way to Bernanke boost

After their tapering fears tantrum earlier in the month, stock markets soared the other way yesterday thanks to Ben Bernanke’s latest remarks.

His assurances that Federal Reserve help will be on hand for some time yet saw US stock markets reach new closing highs last night and that surge has boosted share indices around Europe in early trading.

After the Fed pledged on Wednesday to keep interest rates low until unemployment falls nearer to levels last seen before the banking crash the Dow Jones industrial average and S&P 500 index both rallied on Thursday to achieve at new record closes.

The Dow Jones industrial average rose 169.26 points, or 1.1%, to 15,460.92. The S&P 500 gained 22.4 points, or 1.4%, to 1,675.02 and the Nasdaq Composite added 57.55 points, or 1.6%, to 3,578.3.

This morning, Germany’s Dax is up 0.6% at 8205, France’s CAC40 is up 0.3% at 3882 and the FTSE 100 in the UK is up 0.2% at 6557. Reuters reports that world stocks are heading for their best week in almost eight months — MSCI’s world stock index, which tracks markets in 45 countries, is on track for its best week since November.

Michael Hewson, senior market analyst at CMC Markets UK comments:

When Fed Chairman Ben Bernanke gave his post FOMC press conference in June he compared the Fed’s intentions with respect to tapering to that of “easing up on the gas pedal as the car begins to pick up speed, not applying the brakes”.

The subsequent market response to that was to push up US bond yields, particularly at the long end of the yield curve, which caused a ripple through effect into the US economy, and in the process tightening up lending conditions.

Mr Bernanke’s response, at his speech on Wednesday, appears to have been the equivalent of a quick pump of the accelerator, pushing the said car back up to cruising speed and in the process we’ve seen US markets close at their highest ever closing levels, and just shy of their previous all time highs, as US markets continue to outperform their European and global peers.

These positive finishes look set to translate into another positive open for European markets this morning as we look to finish the third successive week in a row in positive territory, though China could be a cloud on the horizon after the finance minister suggested that growth could come in at 7% for this year, which is below the governments official forecast as well as a whole host of others.

Updated at 9.28am BST

8.38am BST

Upgrade for Ireland on faster fiscal progress

Good morning and welcome to our rolling coverage of the latest events across the eurozone, the financial markets, and the global economy.

The main piece of news early on is an upgrade from ratings agency Standard & Poor's to its outlook on Ireland's credit rating. It has bumped the outlook up to "positive" from "stable" on a view the Irish government may beat its fiscal targets and cut its debt faster than expected.

Also coming up today (all UK times) we have:

UK construction output at 9.30am. The sector is only a small part – just shy of 7% – of the overall economy but this data series from the ONS is closely watched by economists trying to call UK growth. More to follow on that.

Eurozone industrial production data are due at 10.00am

• In the US the latest University of Michigan consumer sentiment survey is out at 2.55pm and is expected to show a pick-up in optimism

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