11 November 2011 at 9:38 GMT
"You're only supposed to blow the bloody doors off!" - Charlie Croker
The broader risk backdrop to financial markets was initially much more positive yesterday. The European Central Bank purchases of Italian and Spanish sovereign debt saw the much watched Italian 10-year bond yield fall back below the 7 percent and broadly to where it closed on Tuesday. Speculation that the Italian parliament will be headed by Mario Monti and that Lucas Papademos would take over the premiership of Greece also added a touch of calm to the proceedings.
If Italy has become the new Greece, will France become the new Italy?
Whilst the economic fundamentals of Italy are not necessarily comparable to those of Greece (ultimately that the issue for Italy is largely one of liquidity and not solvency), in the respect that the relative level and slope of the Italian yield curve have become a key driver of global sentiment and market positioning, Italy has become the new Greece. Ironically however amid the calls from Chancellor Merkel’s economic advisor that “Italy is too big to fail” and despite the fact that the “EFSF is unable to cover Italy” that Italy must be saved, it was the bonds of France that came surreptitiously under fire. Ten-year French yields rose over 20 basis points on the day to a new record high spread to Germany.
US economic data was encouraging yesterday with a 4 percent narrowing of the trade deficit for September, most significantly driven by an expansion of exports to a record level. The combination of the better than expected September figure and positive revisions to August may have a slightly net positive impact on Q3 GDP when we get the revisions. Furthermore, on the jobs front, the weekly claims data showed an encouraging drop down to the 390 level, with continuing claims now standing at just above the 3.6 million mark. Whilst data on the day is likely to support my view that the economic differentiation between the Eurozone and (in particular) the US and UK is about to widen dramatically over the coming months, the positivity however is not enough to make up for the broader uncertainty that still underlies the Eurozone project and ultimately the EUR, Italian bonds, and equities have failed to make a convincing rally.
“There is no silver bullet to restore confidence at this juncture”
– European Commission
In stark contrast to the moderately brighter US growth and employment picture; ECB, EC and EU forecasts for the Eurozone, whilst sticking to their central view that there will not be a default or a Eurozone member exit, their growth forecasts were all marked sharply lower. The risks to these ‘central forecasts’ however are very still much to the downside in my opinion and EU commissioner Rehn’s statement yesterday that he sees “weak growth in the first half of 2012” is likely to prove an understatement.
Lies, damn lies and statistics
The European Commission detailed forecast statistics yesterday made some interesting reading. Unemployment in the Eurozone is forecast to remain steady over the next few years (around its current 10 percent level), despite the breakdown showing rising unemployment in the vast majority of the EU17 states, Germany of course the outlier backed up by Estonia and Ireland. In terms of GDP the breakdown is very similar with 2012 coming within touching distance of stalling, even with the relatively positive ‘central scenario’ assumption. I for one am much more pessimistic about the growth prospects of the Eurozone going forward, particularly in the first half of 2012.
For today however with little on the data calendar, as many in the US are off for the Veterans Day holiday, the focus of market attention is likely to be on equity markets, Italian (and increasingly French) bonds, Eurozone political rhetoric and of course the Italian Budget vote.