European stock markets bounce back while Asian shares enter bear market territory
• Spanish bond auction goes well
• UK gilt auction sees lacklustre demand
• UK retail sales disappoint in November
• Eurozone poised for 'mild' recession
• China manufacturing PMI still contracting
Live blogging now: Julia Kollewe
Our man in Rome, Tom Kington, has this:
He stood up to the ambitions of Microsoft when he was EU competition commissioner, but Italian prime minister Mario Monti appears to have found his match in Italy's taxi drivers, who have long resisted moves to liberalise their profession, as anyone who has tried to find a cab in Rome or Milan when it rains will testify.
Against expectations, Monti has failed to insert measures to add more taxi licenses into his austerity budget, which faces a confidence vote in the lower house on Friday, raising doubts over his will to free up Italy's closed shop brand of capitalism.
That is a problem for Monti since one of the reasons Silvio Berlusconi lost all credibility with the EU was his utter failure to tackle Italy 's powerful trade lobbies.
After Democratic Party leader Pierluigi Bersani said he was "stupefied" by the lack of liberalisation measures, Italy 's trade minister Corrado Passera promised on Thursday that the government would continue to tackle the issue , but admitted "It is a very difficult world, where resistance is insane."
The Northern League party is meanwhile doing its part to hold up Monti's program of tax hikes and pension cuts. After waving banners against taxes at Monti in the Senate yesterday, two League MPs were ordered out of the lower house today after insults flew.
The view from Berlin: Britain is on its way out from the EU, believes Frank-Walter Steinmeier, the leader of Germany's opposition German Social Democrats. After Cameron's EU summit veto last Friday, Steinmeier opined: "I fear that this is the crucial step for a withdrawal of Britain from the EU."
The falling value of the euro dominates the financial press, along with news that US investors are withdrawing billions from European, including a large number of German, banks.
The financial daily Handelsblatt has an interview with Hans Redeker, chief currency strategist at Morgan Stanley, who predicts a difficult future for the euro, and explains why its value will drop to $ 1.20 by the summer as investors pile into dollars. It dipped below $1.30 this week after the ECB lowered interest rates for the second time this year. But Redeker thinks that a break-up of the eurozone is "very unlikely" for political and economic reasons.
More UK data: manufacturers saw the biggest drop in factory orders in more than a year, mainly due to weaker exports. The CBI's industrial trends survey showed the orders balance fell to -23 this month from -12 in November, the lowest reading since October last year. The export orders measure worsened to -32 from -31, the weakest since January 2010.
CBI chief economic adviser Ian McCafferty said:
Conditions in the UK manufacturing sector remain difficult. The weaker export performance no doubt reflects ongoing instability in the euro area, our biggest export market, and its knock-on impact on prospects for the real economy.
A clear and orderly resolution to the [eurozone] crisis remains essential to prevent further adverse effedcts on both UK manufacturing and the wider economy.
Following the Spanish bond auction, which went quite well, the UK sold £4bn of 1.75% gilts maturing in 2017 but demand wasn't as good. The Debt Management Office only got 1.27 times cover - well below the 1.66 cover ratio achieved at the last bond sale in October, and the lowest in any gilt auction since May.
March gilt futures extended losses by more than 20 basis points after the auction.
Amid speculation that Standard & Poor's is gearing up for a downgrade of France's top credit rating, the head of the Bank of France Christian Noyer said today there is no justification for that. Controversially, he suggested that Britain's AAA rating should be downgraded first.
In an interview with local newspaper Le Telegramme de Brest, Noyer, a member of the ECB's governing council, also questioned whether the use of ratings agencies to guide investors was still valid.
In the arguments they [ratings agencies] present, there are more political arguments than economic ones.
The downgrade does not appear to me to be justified when considering economic fundamentals. Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping.
Noyer was also unhappy about critical comments from ratings agencies following last week's EU summit in Brussels. He said such comments had weakened positive sentiment in the markets following the agreement to draft a new treaty for deeper integration in the euro zone.
Frankly, the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid.
Spain has sold just over €6bn of bonds maturing in 2016, 2020 and 2021. The average yield, or interest rate, on the 2016 bond fell to 4% compared with 5.27% at the previous auction on 1 December. But the yields on the 2020 and 2021 debt have risen, to 5.2% and 5.5% respectively.
Spain saw solid demand for the bonds, paying over 2 percentage points less to issue a 5-year bond than Italy yesterday. It far exceeded its target of selling €3.5bn bonds. It seems that investors have been reassured by Madrid's cost cutting.
Michael Derks, chief strategist at FxPro, believes that while this year Europe has dominated the headspace of investors and traders, next year China will absorb much of the focus.
Europe may be terrifying, but equally frightening are the signs that China's booming economy is rapidly unravelling. Recent surveys of manufacturing suggest that growth in the sector is actually contracting, money supply growth last month was the slowest for more than a decade and export growth has slowed markedly, especially to Europe. Property prices are declining and quite quickly in some major cities. For instance, one survey of new home prices in Beijing claimed that they fell by more than one-third in November alone. Developers, squeezed by lending restrictions and higher rates, have invariably been forced into a fire-sale of new developments at a time of huge oversupply. In many cities, property valuations had become completely unsustainable in terms of price/income ratios.
As is so often the case, excess leverage is amplifying China's slide. According to the IMF, the value of loans as a percentage of GDP has doubled in the country since 2006. Justifiably, there is growing concern that bad debts at financial institutions could grow quite swiftly next year. China will soon discover just how difficult it is to manage the combination of widespread deleveraging and a large debt mountain.
At the same time, it must be said that China has a fair degree of policy flexibility available. Bank reserve ratios must be lowered as a matter of urgency, and by a significant percentage; fiscal policy needs to be loosened and the currency needs to be allowed to depreciate, especially with dollar demand so strong. The latter may be controversial, and would certainly attract enormous ire in Washington (especially during an election year), but would be defensible, especially if China slipped back into recording trade deficits. Offshore investors have been fleeing China over recent months in any event – witness the 30% decline in the Shanghai Composite over the past six months, the recent pressure on the yuan and the decline in China's massive foreign exchange reserves in recent months.
Britons' satisfaction with the Bank of England has fallen to a record low although inflation expectations eased from a three-year high, a quarterly survey from the central bank found.
More on the Office for National Statistics' latest retail sales figures. While they were down 0.4% last month, broadly in line with City forecasts, monthly increases in September and October were both revised higher, leaving retail sales 0.7% higher in the three months to November.
Samuel Tombs, UK economist at Capital Economics, says:
Today's official UK retail sales figures confirm that November was a bad month for retailers and will raise concerns that spending will be soft over the crucial festive period. Both food and non-food sales fell sharply.
What's more, the drop in sales volumes may have been greater had retailers not resorted to another month of discounting. Granted, consumers might just be putting off their Christmas shopping until the last minute. But anecdotal evidence from retailers and recent surveys suggesting that shopper numbers are still down on their levels a year ago indicate that such a surge has not come through yet. Moreover, a splurge by consumers in the final weeks before Christmas will only mean that retail spending in early 2012 is even weaker than currently seems likely.
Retail sales in Britain fell in November as consumer cut back spending on computers, mobile phones, watches and jewellery. Official figures showed sales volumes including fuel dropped 0.4% from the previous month, and were down 0.7% excluding fuel.
Let's take another look at the markets. European stock markets have bounced back from heavy losses in recent days. The FTSE is up nearly 20 points at 5385, a 0.36% rise while Germany's Dax has climbed less than 50 points, or 0.8%, to 5722 and France's CAC is up 23 points, or 0.8% at 2999. Spain's Ibex has risen 0.5% and Italy's FTSE MIB is up 1%.
On bond markets, ten-year Italian bond yields have hit 7.26% while Spanish yields are steady at 5.73% ahead of a bond auction of €3.5bn of 2016, 2020 and 2021 bonds - the last eurozone debt sale before the Christmas break.
Spain is likely to get decent demand today - but at the cost of paying record interest rates, according to WestLB's eurozone rates strategist Michael Leister.
Manoj Ladwa, senior trader at ETX Capital, says:
Global markets are staging something of a recovery this morning as traders edge back into assets that suffered the brunt of yesterday's selling. Equities, gold and crude oil are all attracting interest as opportunistic traders pile in for a rebound. But the initial euphoria may be short-lived as Chinese and European manufacturing figures continue to show signs of contraction, further confirming the global economic weakness.
Reaction to the eurozone PMI surveys is slowly trickling in. Analysts have been slow to react... (it's not Christmas yet!)
Martin van Vliet at ING says the readings suggest the "eurozone economy is slipping into a 'mild' recession rather than falling off a cliff".
The pick-up in the composite PMI was primarily driven by a further improvement in the services component, tentatively suggesting that domestic demand in the large "core" countries is not crumbling in the face of fiscal austerity and the financial market turmoil. The manufacturing PMI also bounced up, as we had expected, but at 46.9 it remains very subdued.
Looking at the available country data, the German composite output index rose back into expansion territory (to 51.3), and the French equivalent also saw an improvement (rising from 48.8 to 49.8). A flash estimate for the other eurozone countries is not available, but the average for this group remained in deep contraction territory – which is the most troubling aspect of today's report. Indeed, ongoing economic contraction in the peripheral countries will compound their debt problems.
All in all, despite the further pick-up in December, the PMI data still suggest that eurozone real GDP saw a marked contraction in the fourth quarter (of around 0.4% quarter-on-quarter). Moreover, the subdued forward looking new orders component of the survey points to the possibility of a relapse over the next few months. That said, for now, the PMI data are consistent with a "mild" recession scenario rather than the deep recession we experienced after the Lehman collapse.
More bad news on China. Foreign investment in the country dropped nearly 10% in November.
With the EU — China's largest export market — in the doldrums, China's commerce ministry spokesman Shen Danyang described trade prospects as "grim."
"The impact of the global economic climate means the foreign trade environment is very severe," Shen said. He said China would focus on faster growing regions such as Russia and other emerging economies.
Turning to the euro, which dipped to $1.2991 this morning, Michael Derks, chief strategist at FXPro, has these musings about the strength of the dollar:
Although the euro's decline below $1.30 is attracting much of the attention in FX markets, it is actually the continuing surge in the dollar which ought to be generating just as much interest. The dollar index jumped to 80.5 yesterday, not that far from the high for the year recorded in the first few days of January. Since the end of October, the dollar index is up by more than 7%, a very significant move for the world's major reserve currency.
Dollar demand over the past couple of months has been very pronounced for a number of different reasons. First, both investors and traders have been rushing to divert some of their euro exposure into the greenback, fearing Europe's sovereign debt and banking crisis could actually result in the demise of the single currency and/or many of Europe's largest banks. Second, financial markets in Europe have completely seized up, making it exceedingly difficult for banks and companies to obtain funding. As a result, they have been forced to get funding in other currencies, principally the dollar. Third, the US dollar is benefitting from the improving economic fortunes being enjoyed in America, which contrast sharply with those of Europe where most economies are either already in or are directly heading for recession, and in Asia where growth is also slowing. On Tuesday, the Fed actually upgraded its economic forecast.
To be clear, the dollar is not just benefitting from euro abandonment. The gold price has collapsed by another $150 this week as investors reduce their safe-haven bets on the precious metal in favour of the greenback. High-beta currencies such as the Aussie and the Indian rupee are suffering as well. It is little wonder the dollar is in such high demand. As we have been suggesting recently, these themes supporting the dollar could run on for some time to come.
The eurozone continues to contract, but at a slightly slower pace. The overall PMI survey edged up to 47.9 this month from 47 in November, with services at 48.1 (November: 47.5) and manufacturing at 46.9 (November: 46.4).
The latest German PMI surveys are out: Both manufacturing and services have improved slightly. The manufacturing index rose to 48.1 in December from 47.9 in November, still indicating contraction. The services PMI hit 52.7, up from 50.3. The composite survey, which comprises both sectors, hit a four-month high of 51.3 against 49.4 in November.
Survey compiler Markit tweeted:
Markit Economics
Germany on course to avoid GDP contraction in Q4…but it's touch and go
The European Central Bank fears that higher bank capital requirements could push the economy into a recession as they would hold back bank lending, news agency Market News International reported, quoting anonymous sources.
The European Banking Authority has decreed that banks should have core Tier 1 capital of at least 9% of risk-weighted assets, exceeding the 7% minimum world leadres agreed to phase in from 2013. It estimates that European banks would need an extra €114.7bn of cpapital.
Doubts about the limit are growing, with the ECB concerned that banks could sell assets and tighten lending criteria to hit the new capital targets.
A eurozone central banker told MNI:
If you combine [asset] disposals with an agressive fiscal tightening, you are creating the conditions for a sharp contraction.
Get your shotguns ready. Britain's defence chiefs are taking the eurozone crisis so seriously they've begun to draw up plans to cope with the potential military fallout, the Daily Telegraph reports.
Gen Richards, the Chief of the Defence Staff, said economic issues present the biggest threat to Britain and its interests in the world. He told the Royal United Services Institute:
I am clear that the single biggest strategic risk facing the UK today is economic rather than military. Over time, a thriving economy must be the central ingredient in any UK Grand Strategy. This is why the eurozone crisis is of such huge importance not just to the City of London but rightly to the whole country and to military planners like me.
The Armed Forces are facing painful cuts and the loss of tens of thousands of personnel.
London's leading shares have opened slightly higher, trading up 16 points at 5383, a 0.3% gain. Germany's Dax is up 0.45% while France's CAC edged 0.15% higher.
Good morning. Welcome back to the live blog. We'll be bringing you the latest news and developments on the eurozone debt crisis and world economy.
Asian stocks have entered bear market territory and the euro and commodities like silver are nursing losses amid a flight to less risky investments such as the dollar. Spot silver lost more than 2% to $28.26, the lowest since the end of September as investors retreated from metals. The euro is hovering near an 11-month low of $1.2945.
Italy was forced to pay an eye-watering 6.47% on 5-year bonds yesterday, a record borrowing cost for the euro era, after last week's EU summit failed to deliver a lasting solution to the eurozone crisis.
A private sector survey indicating China's factory output will shrink again in December added to the gloomy mood today. The HSBC PMI for manufacturing rose slightly in December but stayed in negative territory. It hit 49 compared with 47.7 in November, still indicating contraction.
And big Japanese manufacturers turned pessimistic this quarter, the Bank of Japan's latest Tankan survey showed, a sign the stubbornly strong yen, Europe's debt crisis and slowing global growth are taking their toll on the export-reliant economy.
Michael Hewson market analyst at CMC Markets says:
With cracks starting to appear in Friday's fiscal compact the agreement could not be more badly named because it is anything but. This has seen investors finally lose confidence and seen the single currency break below $1.30.With ratings agency Fitch downgrading a host of European banks last night, the prognosis continues to go from bad to worse, with Credit Agricole downgraded one notch to "A+".
European markets are set to continue their week-long sell-off, with Germany's Dax and France's CAC poised to open 0.3% to 0.4% lower. Wall Street is also expected to make a weaker start.
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Source: http://www.guardian.co.uk/business/2011/dec/15/eurozone-crisis-live
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