The euro was little changed against the pound yesterday on a quiet news day as the markets took comfort of the new technocrat governments installed in Athens and Rome ahead of a raft of UK data out over the next 3 days which is expected to highlight just how fragile the economic recovery in the UK is.
Risk aversion continues to rule sentiment as investors once again fretted about the daunting task of steering Italy away from the European debt crisis. This sent the US dollar sharply higher as demand soared for its ‘safe haven’ status.
Worryingly, bond yields started the week sharply higher with Italian bond yields reaching 6.29% while the yield on Spanish 10 year bonds rose to 6.11%. Last week Italian bond yields rose above 7% amid intense political turmoil but by the end of the week markets experienced a wave of optimism about the debt crisis, following the appointment of Italy’s technocratic government.
Moody’s Investors Service questioned the effectiveness of the European Financial Stability Facility in a report out yesterday afternoon which soured sentiment. Moody’s noted that the fund’s ability to support the European bond market is limited.
The uncertain UK economic outlook also clouded demand for the pound while investors also booked profit on the pound’s advance in the last week when it briefly touched an 8 month high last Wednesday afternoon against the euro.
Investors will be keeping an eye on Wednesday’s inflation report from the Bank of England. The central bank is widely tipped to slash its growth forecasts and we also have the latest unemployment and retail sales data published.
Yesterday, data showed that euro zone industrial production contracted by 2.0% (2.2% annual) during the month of September, according to the latest data from Eurostat, the EU’s statistics office. The market consensus was expecting a reading of -2.3% and 3.6% respectively. The previous month’s reading was unchanged at 1.4% and 6.0%.
On a country by country basis, industrial production rose in 11 countries, fell in 10, and remained flat in the U.K. In month-on-month terms industrial production fell in Portugal (-5.8%), Italy (-4.8%), Ireland (-3.5%), Germany (-2.9%), France (-1.9%), Spain (-1.3%) and Greece (0.1%).
Expect further turmoil in the markets as a mixture of economic data brings the economic situation into sharp focus and further Italian and Spanish bond auctions will be keenly watched to see if the yield again touches the key 7% level that triggered the bail-outs of Greece, Ireland and Portugal in the last two years.
