European markets soar on ECB rethink and US jobs data
European markets have ended the week on a positive note, with investors having a rethink about their negative reaction to Thursday's ECB statement, and a much better than expected US non-farm payroll number
So the FTSE 100 has soared 124.98 points - 2.21% - to 5787.28, a three month high. Germany's Dax is up 3.93%, France's Cac 4.38%, Spain's Ibex 6% and Italy's FTSE MIB 6.38%. The Dow Jones Industrial Average is currently 240 points or 1.87% higher.
Spanish and Italian bond yields have edged lower and the euro strengthened against the pound and dollar.
So on that positive note, we'll leave you for the weekend. Back next week for all the latest developments, and thanks for all your comments.
Juncker's visit comes two days before prime minister Antonis Samaras begins a crucial 48-hour visit to Paris and Berlin where he will hold (yet another round of ) crunch talks with French president Francois Hollande and German Chancellor Angela Merkel.
"Jean Claude Juncker's visit is judged exceptionally significant at such a critical juncture and taking into account that just a few weeks ago European Commission president Jose Manuel Barroso also visited our country," said ERT.
Perhaps more significantly, however, it will be the first time that the conservative Samaras meets the bloc's big players since assuming the helm of Athens' fragile six-week-old coalition. Readers will recall that the 61-year-old leader underwent emergency eye surgery within days of his centre-right New Demoracy party emerging on top in national elections in June.
Spain's El Pais has more details on Rajoy's budget submission to Brussels. My colleague James Gard says, the plan covers the years 2013-2014 and includes cost-saving measures already announced in 2011 and also agreed this year. Among these measures are tax increases (including rises in IVA, their VAT), cuts to salaries, plans to 'stabilise' the finances of the regions.
But the Spanish press is focusing on newly announced cuts to health and education budgets to the tune of €3.75bn.
The overall figure for the total savings now comes to €102bn.
Spanish Prime Minister Mariano Rajoy at his press conference in Madrd. Photo: EPA/Fernando Alvarado Photograph: Fernando Alvarado/EPA
More positive news as the markets end the week on an upbeat note. Bloomberg has a report saying members of German chancellor Angela Merkel's coalition will not stand in the way of the ECB buying government bonds. The Germans, of course, have been perceived as the arch opponents of such moves. Bloomberg says:
The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a European Parliament lawmaker and executive-committee member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today.
The positive mood in the market has been reinforced by some positive US service sector figures.
Investors had already done something of a U-turn following Thursday's disappointment at the ECB's perceived lack of action. So the market falls had been reversed, even before better than expected US non-farm payroll numbers.
Now the ISM index of services has climbed from 52.1 in June to 52.6 in July, compared to expectations of a drop to 52.
So the Dow Jones Industrial Average is up nearly 220 points, the FTS 100 has climbed more than 2% while European markets are also soaring.
Foxman explains that Draghi set forth criteria that EU political leaders must abide by in order to receive aid, while at the same time promising that EU countries like Spain and Italy won't fail in the short term.
In other words, he sent the following message: "If you do that, then I will do this."This is a a divergence from earlier policy, which was unpredictable and reactive.
For the first time, the ECB really is saying that it will make reducing sovereign borrowing costs (at leat at the short end) a matter of clear policy.
She says this won't necessarily be good for markets, as Draghi has essentially said he will push EU leaders to the brink before he does anything. But, she argues, that the announcements should help restore confidence in the eurozone.
However, in the real economy, Draghi's promises to act are invaluable. It could give investors faith enough to invest in the real economy because the ECB's long-term promises are clear, despite continued volatility in the markets.
Back to Madrid, where Stephen Burgen reports that morale has hit a new low:
Consumer confidence has fallen below its previous all-time low, in 2008, with 90% of Spaniards believing the economic situation has worsened in the past 6 months and 60% believing things are going to get worse.
News in from Greece where our correspondent Helena Smith says it is not just the opposition firing broadsides at the government over its economic policies. Helena writes:
The centre-right New Democracy party, which leads Greece's fragile three-party coalition, has been forced to axe an MP for attacking the government’s line. Nikos Nikolopoulos, who for a brief few days served as labour minister in the six-week-old administration, was expelled from the party’s ranks after sparking uproar with a series of tweets today.
The politician, who resigned over the government’s “unfair” policies in June, voiced outrage over its decision to implement a new, €11.5bn package of savage cuts over the next two years when all three parties had pledged to “renegotiate” the arduous terms of the bailout.
“The strategic dead-end is obvious,” he tweeted. “The hope of renegotiation was just a dream. What can a breathless people expect? Mercy or punishment from the troika?”
Nikolopoulos also voiced fears that the new round of belt-tightening would exacerbate Greece’s worsening economic contraction. “Recession for the Guinness Book of Records,” he wrote. “Our country has more years of recession than any other in the world. The country just can’t take any more.”
A well-respected cadre, the MP had reportedly enjoyed close ties with prime minister Antonis Samaras who assumed the leadership of New Democracy in late 2009. But it seems those ties are now well and truly severed. When Samaras ousted Nikolopoulos from New Democracy’s parliamentary group, he also demanded that he be brought before a disciplinary committee to decide whether the MP should also be expelled from the party.
The pace of job creation in the US is still at a very low rate by historical standards.
Bill McBride at Calculated Risk has produced a troubling chart that shows job losses after the recession of 2007 were far worse than anything since the Second World War, and the subsequent rise is far weaker than during any other recession.
My colleague Dominic Rushe, over in New York, writes that the jobs data offers some relief for President Barack Obama, as the economy has become the key battleground of the 2012 election.
The labour market has slowed sharply after strong gains of over 200,000 a month in the winter, spelling trouble for Obama ahead of the November 6 election.
A recent Ipsos/Thomson Reuters poll showed Republican presidential candidate Mitt Romney ahead of President Barack Obama on the economy with 36% of registered voters believing he has a better plan compared to 31% who had faith in Obama's policies.
Chris Williamson of Markit says the Federal Reserve is unlikely to push the button on stimulus measures following this jobs report.
If the previous three months of lacklustre job creation were not enough to spur the FOMC into acting more aggressively to stimulate the economy, these numbers must surely kill off the possibility of imminent action.
But he says the Fed will remain alert to other signs the US economy is struggling.
Disappointing readings from other indicators, such as the 0.2% drop in retail sales and the 1.4% fall in factory orders in the second quarter, plus the lowest Manufacturing PMI for three years in July, suggests that the US economy has lost considerable growth momentum so far this summer. It would therefore be no surprise to see the labour market upturn lose its legs again in coming months if this loss of momentum continues, and for the Fed to see a renewed need for further stimulus.
The yield on the Spanish 10-year government debt has slipped below the dangerous 7% level.
Markets are slowly digesting Mario Draghi's comments yesterday that opened the door to a new bond-buying programme and fully-fledged quantitative easing (QE). Gary Jenkins of Swordfish Research says:
The QE argument is winning the market over today. QE could be a game changer in the short-term, if they can really do it.
The yield on the Spanish 10-year is 6.97%. The yield on Italian 10-year debt is 6.04%.
Back to Madrid, where Rajoy has just wrapped up the conference, with a nod to the fact that European policymakers may have to slog through August (rather than take the month off, as Europeans are wont to do).
A happy summer, for those who can.
Before that he said Spain was not planning to adopt another package of labour market reforms.
He also said Europe can't accept unequal financial treatment of countries within the eurozone.
But the unemployment rate in the US has ticked up to 8.3%. The broadest measure of unemployment, the so-called U-6, which includes part-time workers who want to work full-time but cannot due to economic reasons, rose to 15% from 14.9%.
If you wanted one piece of news which contains both good and bad news, #NFP it is. Over to you #Bernanke
Spanish Prime Minister Mariano Rajoy faces questions over why Spain has not asked for a bailout. Photograph: Xie Haining/ Xie Haining/Xinhua Press/Corbis
Rajoy says he wants the banking union agreed at December summit. That chimes with other European policymakers. Whether they will achieve it or not remains to be seen.
People may not like the decisions we have taken but no one can accuse this government of not taking decisions and it has shown it is able to govern in difficult circumstances. The government knows exactly where it has to go and what it has to to do and we will do it, however difficult.
Rajoy is now pointing out the bright spots. He says Spain sells more to the eurozone than it buys.
We have a trade balance surplus with Germany, we sell our eurozone partners more than we buy from them.
He's now wrapping up his speech and apologising for taking so long but says it's hard to sum up six months in power in half an hour. Floor is open to questions.
Rajoy is reviewing what his government has done since it took office seven months ago. He says Spain's three main problems are the public deficit, a financial system burdened with debt and doubts about the euro which hurt the most vulnerable member states most. He then listed the five lines the government is following to deal with these problems: get rid of the deficit, structural reforms, reforms carried out jointly with the EU, resolve the liquidity problems and overcome uncertainty over the euro. He is now expanding on each of these points. Tellingly, he qualifies much of what he is saying with the words, "as you already know." In short, nothing new so far.
Spanish prime minister Mariano Rajoy is still speaking following his cabinet meeting this morning. He says he has sent a letter to Euorpean leaders asking for debate and speed on reform work.
He says he has not abandoned the issue of regional finances.
Biggest release of economic data today is the US non-farm payrolls (NFP), which shows the monthly change in employment, excluding the farming sector.
Today, economists are targeting an increase of 100,000 jobs on last month. The unemployment rate is expected to remain unchanged at 8.2%.
Christian Lawrence, a Rabobank analyst, said a weak figure could prompt the Fed to undertake more quantitative easing (QE):
The FOMC disappointed the market earlier this week with no further action except a more forceful tone with respect to the Fed’s promise to act if the economic outlook deteriorates, so it is clear that a significant weakening of US macro data will raise the likelihood of the Fed acting sooner rather than later. Given that NFP is one of the main indicators of the US business cycle, a soft print today will be accompanied by rising expectations of QE3.
The impact of the data on markets is complicated. A weak figure could damage confidence causing a stock market rout, but it could also mean more QE, which would boost stock markets.
In the foreign exchange markets, a bad reading could be negative for the US economy and therefore the dollar. But a bad reading could also prompt investors to feel nervous about the global economy as a whole, which might drive them to safe-havens, such as the dollar.
The number of company and household insolvencies in England and Wales fell sharply in the second quarter, data from the Insolvency Service showed.
There were 4,115 company bankruptcies, both compulsory and voluntary arrangements, in the three months to June, a fall of 3.6%.
However, the total number of company bankruptcies over the past year has actually increased by 3.3% to 21,832. This has been driven by an increase in Company Voluntary Arrangements (CVA) which are up by 17%. Lee Manning, president of the association of business recovery specialists (everyone's got to have an association) R3, said:
The increase in CVAs is intriguing and shows the rescue culture at forefront of people’s minds – with the creditor community arguably being more flexible. These are hard times for everyone, and perhaps the creditor community would rather take a hit than see a company go under entirely.
Taking another look and Spain and Italy's bond yields. The difference of the yield – effectively the interest rate – on short and long-term dated debt is widening, as a direct result of ECB president Mario Draghi's comments yesterday.
Draghi said that if the European bailout funds intervened in the bond markets, they would buy short-term dated debt. That has sent the price of short-term bonds up, and their yields down.
However, Draghi's failure to produce a credible plan to save the euro meant traders still sold off long-term debt in the crisis-hit countries, driving yields higher.
Spanish two-year and 10-year bond yields Photograph: /Scott Barber, Reuters
Gary Jenkins of Swordfish Research suggests the traders' reaction may be a little hasty:
Now maybe I missed something but whilst Draghi did indeed say that the ECB would target the short-end, I didn’t hear any confirmation that the rescue funds would do the same thing. Thus (and apologies if I did miss this) there is no reason why the ECB couldn’t buy short-dated [bonds] whilst the rescue funds targeted longer-dated paper.
Over in Athens, the governor of the central bank is defending his decision to hand over the healthy assets of agricultural lender ATEbank to Paraeus Bank.
He said the ECB had decided to stop funding ATE bank after July as it was "undercapitalised and not viable". He said the closure of the bank had to be avoided to ensure the stability of the banking system and prevent 5,000 job losses. George Provopoulos said:
ATEbank was not viable. If it shut down, we would have had thousands of unemployed youths... the systemic stability that we have carefully safeguarded would have been shaken.
The yield on the Spanish 10-year government bond – effectively the interest rate – is dropping back from this morning's highs, but remains above the 7% level, which people say is unsustainable. The yield is currently 7.17%. The yield on the Italian 10-year is 6.17%.
Traders are concerned that the ECB had muddied the waters by saying any intervention in the markets would have conditions attached. One said this morning:
ECB President Draghi did not deliver the bazooka markets expected, far from it (see The ECB disappoints). He made ECB bond purchases conditional on countries formally requesting these purchases (through the EFSF/ESM) and abiding by a set of conditions. In this context, he disappointed markets by making ECB interventions in sovereign bond markets more difficult. We do not expect peripheral countries to request EFSF/ESM purchases unless they are forced by markets (as was echoed by both PM Rajoy and PM Monti), and the reduced supply in August buys them time. By conditioning ECB support on EFSF programmes, the timing of the implicit ECB backstop becomes more uncertain, weakening its near-term market impact, in our view.
Retail sales in stores across the eurozone rose 0.1% in June, after a 0.8% rise in May. Economists had wildly differing forecasts of what would happen, from a 0.3% increase to a 0.8% fall, with a consensus that sales would remain flat.
Sales in Germany dropped 0.1%, the third consecutive fall. Ireland was the worst hit, with sales down by 2.2%.
Howard Archer of IHS Global Insight says public sector cuts have driven the slowdown in the services sector:
The services sector is being hampered by difficult conditions in the private sector as well as by tighter government spending. For example, the Bank of England’s regional agents reported in their June survey of business conditions that some outsourcing companies “had been squeezed as public sector bodies bought work in-house”. It is also evident that concerns and uncertainties over the state of the economy are leading to some businesses delaying or cancelling busisness.
Meanwhile, many consumer-facing services companies are handicapped by the still generally difficult conditions facing consumers and the related inclination/need of many people to limit their discretionary spending.
James Knightley of ING Bank says the numbers show the UK is doing better than many of its European neighbours:
The PMI compiler states that there is still a hang over from bad weather and the pre-Olympic build-up has had a dampening effect on orders and production ... Overall, it is a touch disappointing, but not horrific and suggests that the UK private sector continues to outperform that of most of Europe – something that is not evident in the GDP numbers.
But Alan Clarke of Scotia Bank is less upbeat:
So even after taking account of bad weather and lost working days, survey indicators no longer suggest that underlying growth is as resilient as it was previously. To put a positive spin on things, at the very least it isn't pointing to an imminent collapse in the headline index... But if that is the most positive thing we can say, then it is a pretty sobering thought.
On a happier note, UK services companies were more upbeat about the coming year, with the confidence index rising to 65.6, from 64.3. The companies also increased hiring fro an eighth successive month.
That chimes with other economic data showing strong job creation since the beginning of the year. It will further fuel debate among economists, who say the jobs data simply does not reconcile with grim GDP data.
Markit said the composite PMI for the UK, suggests the UK economy stagnated in the third quarter. Notably, PMI data suggests the economy grew by 0.1% in the second quarter, compared with the ONS estimate that it shrank by 0.7%.
As one independent economist notes, the UK PMI data (see earlier) puts paid to hopes that the economy would rebound in July after the extra bank holidays in June.
UK Services #PMI drops back to 51 in July so growth but not as we know it..Worst number for 19 months so much for blaming the Jubilee #gfc2
Growth in the UK's huge services sector slowed in July, fuelling fears that the economy will fail to come out of recession in the second half of the year.
The services PMI dropped unexpectedly to 51 from 51.3 in June, its lowest level since December 2010.
This follows Wednesday's miserable manufacturing figures, and data showing sluggish growth in construction yesterday.
Overall, Markit's composite measure of the UK economy dropped from 51.1 to 49.5 in July. That is the first time it has dropped below 50 since the depths of the financial crisis in April 2009.
Looking at individual countries across the eurozone...
Germany's services sector expanded in July, thanks to better trade at hotels and restaurants. But new orders dropped at their fastest pace in just over three years.
France's services sector stabilised, halting a three-month decline. But (there's always a but) employers cut jobs at the fastest rate since March 2010. Business morale also hit a three and a half year low.
In Spain, the services sector shrank at a slightly slower rate but falling levels of new business suggest an ongoing decline in GDP.
In Italy, meanwhile, the picture was unremittingly bleak. The services sector shrank for the 14th consecutive month and new business fell at its fastest rate in more than three years.
Eurozone companies saw a sharp decline in new orders in July, forcing them to lay off staff. The Markit PMI ticked up slightly from 46.4 to 46.5, but still languishes below the 50 mark, which separates growth from contraction.
The PMI summarises the opinions of purchasing managers, who gauge future demand and adjust orders for materials accordingly. They said orders shrank at the fastest rate since June 2009, which suggests there is little hope of a turnaround next month.
Italy and Spain continued to perform badly, but July's survey showed Germany's companies had also started to struggle. Chris Williamson of Markit said:
The big worry is that the downturn in Germany may be becoming more entrenched, suggesting that the largest euro economies are seeing convergence in collective and mutually-reinforcing decline.
Germany has come out fighting this morning, saying its liability to the European bailout fund is €190b and not a cent more, and reiterating the fact that the bailout fund cannot borrow money from the ECB.
Steffen Kampeter, a senior German finance ministry official, wrote in an opinion piece published this morning:
There is no unlimited liability mechanism and no possibility to change that or the maximum liability amount without the participation of Germany's parliament.
He also repeated the point that the bailout fund cannot recapitalize eurozone banks directly under existing rules.
The introduction of a European banking regulator is an indispensable precondition for direct bank recapitalizations.
A quick round-up of the analysts' overnight take on yesterday's announcement from the ECB.
Just to recap, Mario Draghi said eurozone bailout funds would buy the short-term debt of crisis-hit nations to help keep their borrowing costs down if a) those countries agreed to implement reforms, and b) they sought help from the ECB. The markets were disappointed there was no hope of immediate action, shares tumbled and bond yields shot up.
Gary Jenkins at Swordfish Research points out that the plan is clearly a work in progress:
There is still a way to go before any of the above can actually happen, as not only is the Bundesbank clearly opposed to central bank bond purchases but to my amazement all of the details need to go to various committees to try and decide the best way of enacting Mr Draghi’s ideas. The crisis has been going on for years and I would have thought that deep within the ECB there would have been a team of people working on “what if” scenario analysis and what the correct policy response should be and how it could be best enacted. Apparently not.
Annalisa Piazza, Newedge Strategy, notes the ECB is not speaking with a unanimous voice, with the Germans clearly digging in their heels over attaching conditions to any kind of bailout.
Although the ECB's Draghi gives some hints on the possible details of future non-standard measures, the tone of his answers during the Q&A session seems to suggest that no agreement has been found among policymakers.
Draghi clearly said that the Buba doesn't agree on further bond purchases. As such, we suspect there will be a big deal of negotiation in the coming weeks in order to find a way to revive the bond purchases, with conditions that make the Germans happy.
Charles Diebel, head of market strategy, Lloyds, is more optimistic but notes that governments may be unwilling to ask for help. (Pride comes before a fall... in yields):
All of the announcements, if transferred into actual activity would be close to the 'big bazooka' approach that the markets are looking for, but it requires the governments concerned to ask for help. I think the sceptical take from the markets is understandable but I would caution that Draghi is likely to follow through with actual actions.
So, the IMF has warned that despite the havoc the eurozone crisis has already wreaked, the worst is yet to come.
A big shock in the region would cost the eurozone more than 5% of economic output. The UK would suffer almost as badly, the US could lose 2% of output, while Japan's economy could shrink by more than 1%. Given the slow growth in these economies, that would plunge most of them back into recession.
What does the IMF think could trigger such a shock? A jump in sovereign and private bond yields across the eurozone, a drop in consumer demand, and shifting asset prices, which all sounds worryingly familiar. (The Spanish 10-year is now at 7.37%).
Having set out this doom-laden scenario, the IMF said not enough had been done to solve the eurozone crisis.
In the euro area, the situation calls for a policy game changer, with urgent steps to banking union (now finally moving ahead), fiscal integration, phased fiscal consolidation and monetary accommodation.
Head of the International Monetary Fund Christine Lagarde in London last week. Photograph: CHRIS JACKSON/AFP/Getty Images
China's services PMI came out overnight. It shows the sector growing, although surveys suggested there was some sign of weakenss in new orders and pressure from overcapacity.
The PMI for July fell to 55.6 from 56.7. A figure above 50 shows the sector is growing.
Overnight, the IMF warned that most of the potential economic impact of the turmoil in the eurozone had not yet hit, as part its Spillover Report that looks at potential threats to the global economy. We'll have a closer look at that shortly.
Mario Draghi had raised expectations that he had a blueprint to save the euro, so the only way was down when he was forced to admit he didn't actually have that much up his sleeve, as yet.
The yield on Spanish 10-year debt – which is effectively the interest rate – has hit 7.35%. That is closing in on the record high of 7.58% that it hit in July. Italian bonds are also being hammered, with the yield on the 10-year at 6.42%.
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