28.09.12 Friday Morning

The trading week began with European markets dropping on fears about faltering global growth, highlighted by a weaker than expected German IFO survey which reminded investors that the Euro area’s largest economies are feeling the heat of the debt crisis, pressuring the Euro currency against the Dollar. On top of that, the uncertain situation in Spain continues to rattle nerves with the country expected to present a new structural reform programme by the end of this week.

As the week progressed it became clear that riffs are appearing between EU leaders over implementing measures that will address the Euro zone’s deepening debt problems. German Chancellor Angela Merkel continues to believe that the creation of a  single bank supervisor should be a slow and steady process, while the European commission and France are of other opinions on the pace of integration.

At the same time, IMF Director Christine Lagarde kicked up the pressure on Greece by saying that a worsening economic outlook and a failure to implement structural reforms creates a financial gap which will make it more difficult for the country to service its debt. Greece is looking to finalize its budget plans by the end of the week, however it is evident that EU leaders are not impressed with developments there. Over to Spain and the on-going hesitance by the country to request a full sovereign bailout still rattles sentiment but the country continues to receive strong demand at auctions. Earlier, Spain sold EUR 3.983 billion of 3-month and 6-month treasury bills at auction, close to the upper end of the target range.

Elsewhere, the S&P ratings services cut its growth expectations for the Euro zone this year and next as economic indicators continue to paint a bleak picture for the region. S&P now expects Euro zone GDP to contract 0.8% this year, having forecast a 0.7% contraction in July and expects GDP growth in the region to be flat in 2013 versus previously forecast growth of 0.3%.

Towards the end of the week, Fed official Charles Plosser has hit investors with a bit of a reality check in regards to the central bank’s recent policy efforts. Plosser said QE3 is unlikely to boost economic growth and this could cause reputational damage for the Fed in the long term. His comments have essentially taken the wind out of the Fed-inspired risk-rally, leading market participants to reassess the effectiveness of QE3.

Anxiety over the situation in Spain and Greece tied up with worries that recently announced stimulus measures by central banks are not enough to spur economic growth underpinned the glum price action across Europe. The Spanish IBEX was off as much as 3.3% during the session, following a call for early elections in the Catalonia region and anti-austerity street protests, especially after Spanish PM Mariano Rajoy said early-retirement programmes would be restricted.  In Greece, street protests together with a general strike were in full effect ahead of more austerity measures that are likely to be announced in Friday’s budget reduction plans to EU leaders.

European stock markets were cautiously higher on Thursday morning, attempting to rebound after the previous days hefty losses. Any gains however are likely to be under threat given the civil unrest in Spain ahead of the government’s budget announcement. Traders are reluctant to make any bold moves ahead of the budget announcement which sees the country aiming to cut the budget deficit to 4.5% of GDP in 2013 from 6.3% of GDP in 2012. Such a reduction would bring about harsh austerity measures for the country next year, but would gain approval by EU policy makers and the market alike which would be positive to risk-sentiment.

Friday has seen the European markets respond positively to Spain’s pledge to meet its deficit target which could pave the way for a formal bailout. Spain yesterday unveiled a package of tax hikes, spending cuts and regulatory overhauls. Looking ahead, Spain’s bank stress test results are due, with markets expecting around EUR60 billion of capital shortfalls for the sector. Greece will also be in the spotlight after it reached a deal with coalition partners yesterday for a multi-billion euro bailout austerity plan. In terms of data, we have UK PMI services and in the US, we have Chicago PMI’s and the University of Michigan Confidence survey.

In regards to UK share data we are expecting next week, Wednesday will see the results of Sainsbury’s, Dunelm Group, Sportingbet and Easyjet earnings. On Friday both the Ted Baker & Halfords earnings will be released. On a broader economic note, 10 yr bond auctions (GBP) will take place on Tuesday along with the UK Construction PMI followed by the (UK) Services PMI on Wednesday. Thursday will see the release of the UK Official Bank Rate, the interest rate at which banks lend balances held at the BOE to other banks.