Rising bond yields spell further Euro misery

Concern over the Eurozone debt crisis refuses to abate with Spanish borrowing costs hitting their highest levels since the crisis started. The Popular Party’s victory in the Spanish election failed to ease bond yields as a lack of clarity regarding how the party will address the burgeoning debt, unsettled investors. Similar spikes in bond yields were witnessed in Italy, Spain and France. The European Central Bank (ECB) has been buying bonds to curb the rise in yields. Concerns were highlighted as Maria Dolores de Cospedal, the deputy leader of Spain’s People’s Party, stated that the country needs a Euro-region deal to “save and guarantee the solvency” of its debt, amid soaring bond yields. Further, problems in the banking system were highlighted as the Bank of Spain nationalized the Banco de Valencia. At home Sterling is weighed down by concerns over monetary easing measures, after Prime Minister, David Cameron, expressed concerns over tackling the UK’s deficit.

Pound Sterling – UK Markets

The Pound continues to be plagued by growth worries and expectations of further monetary easing. A leading think-tank, Reform, has warned that Britain would require a decade of austerity to fix its current economic problems, adding that "slow growth is inevitable given the levels of debt in the economy". David Cameron stated that tackling the UK’s debt was “proving harder than anyone envisaged”, thereby raising the prospect that the Coalition would be unable to lower the deficit by 2014-15. This has strengthened speculation that the Chancellor of the Exchequer, George Osborne, in his autumn statement next week, would lower his forecasts for economic growth for the current year and next. Investors are keenly eyeing public finances figures, due today, in light of the upcoming Office for Budget Responsibility (OBR) report next week.

US Dollar – US Markets

The US Dollar traded weaker against the majors as risk appetite amongst investors was restored. This comes after Standard & Poor’s (S&P) and Moody’s Investors Service stated that they would not lower the sovereign US credit ratings. That is despite the Congressional committee’s failure to reach a plan to cut their budget deficit, which Fitch Ratings had stated could lower the outlook on its “triple-A” rating. The minutes of the Federal Reserve’s latest meeting are scheduled for release today, wherein traders will closely watch for the central bank’s view on the economy in the third quarter and cues on the timing and quantum of the possible third round of quantitative easing. Among the major economic releases due today Gross Domestic Product data is expected to indicate stable growth for the third quarter. The currency’s movement is likely to find further direction from the outcome of the FOMC minutes and further development of the bipartisan agreement for budget cuts, ahead of the November 23 deadline.

Euro – European Markets

The Euro has remained resilient and is trading higher against the majors this morning, amid reports that Eurozone finance ministers have agreed to release the next aid tranche of €8.0 billion to Greece at their next meeting in late November. However, there has been a marked rise in yields for Italian, Spanish and French sovereign bonds. The currency came under pressure yesterday, after the German Bundesbank lowered its 2012 forecast for the nation’s economic growth to within a range of 0.5%-1.0%, compared to a previous forecast for 1.8% growth, citing weakening export prospects. Further adding to these concerns, European Central Bank Governor Ewald Nowotny has indicated that there could be further possible cuts in interest rates. Investors keenly await the Eurozone consumer confidence data for November which is due for release today and expected to be largely negative. The currency is expected to be volatile and should take its cue from today’s Spanish bill auction.

Other Currencies – Highlights

The Aussie Dollar is trading higher against its major counterparts amidst increased risk appetite amongst traders. This follows the Eurozone finance ministers’ agreement to release the next aid tranche to Greece. The Aussie Dollar strengthened as the European equity markets and the Dow Jones Futures rebounded from yesterday’s lows. However, concerns over a slowdown in Chinese growth continued to persist, after the World Bank, in its latest East Asia and Pacific Economic Update, stated that economic indicators are pointing toward a soft landing for the Chinese economy. Meanwhile, People's Bank of China vice Governor, Hu Xiaolian, stated that China will adhere to its "prudent monetary policy," but will fine-tune the policy at an appropriate time. The Kiwi Dollar also traded higher, after data indicated that, on an annual basis, credit card spending in New Zealand rose 7.9% in October, following a 5.3% growth recorded in September.