Risk aversion continues to reign supreme with the euro falling to a five week low against the US dollar and the Japanese yen but the single currency held steady against the pound as poor UK economic data also kept the pound under pressure yesterday.
The euro was pressured by rising yields on French and Italian bonds, sparking fears about contagion in the euro zone debt crisis with eastern European countries also feeling the strain, Hungary in particular.
The European Central Bank was seen intervening in the bond market and bought Italian and Spanish bonds but as soon as it stopped purchasing bonds, yields started to climb again, prompting fears about how effective the ECB is in supporting the bond markets.
Late last night, the Greek coalition won its no-confidence vote thus installing the new technocrat government in Athens. Earlier in the day, German Chancellor Angela Merkel said that Germany will, if needs be, sacrifice some national sovereignty in order to strengthen the 27-member euro area.
“Germany sees the need in this context to show the markets and the world’s public that the euro will stay together, that the euro must be defended, but also that we are prepared to give up a little bit of national sovereignty,” she told reporters in Berlin.
Merkel also said that Germany wants a strong EU and a euro “of 17 member states that is just as strong and inspires confidence in international markets.”
The German Chancellor is willing to cede some sovereignty in order to tighten political and economic ties.
In Italy, incoming Prime Minister, Mario Monti has named a cabinet of unelected technocrats in his bid to save Italy from financial ruin. Monti, who will serve as economy minister as well as Prime Minister, told reporters that having talked to party leaders he had decided “that the non-presence of politicians in the government would help it.”
The new government will be sworn in this afternoon bringing Silvio Berlusconi’s 17-year dominance of Italian politics officially to an end. It is tasked with bringing down Italy’s massive public debt, which stands at €1.9 trillion or 120% of GDP.
Last night, credit ratings agency Fitch issued a bleak warning about the potential impact of euro zone’s debt crisis on US banks. Fitch said, “US banks have manageable direct exposures to the stressed European markets such as Greece, Ireland, Italy, Portugal and Spain, however further contagion poses a serious risk.”
In a gloomy day, the pound remained subdued against the euro but fell heavily against the US dollar after the Bank of England’s gloomy projections for the UK economy. The BoE cut its growth and inflation forecasts and indicated that further quantitative easing was on the cards for early 2012.
In further UK data, the Nationwide consumer confidence index fell sharply in October as consumers’ confidence nose-dived due to fears over the euro crisis. The main sentiment index fell 9 points from the previous month’s level to 36, its lowest level since May 2004. Additional factors behind the fall include the steady erosion of real incomes amidst renewed signs of labour market weakness.
“A wave of disappointing economic news and home and on-going uncertainty surrounding the euro crisis has dealt a heavy blow to sentiment,” said Robert Gardner, chief economist at Nationwide.
Following the release of the latest UK employment report, Dr. Howard Archer, chief economist at IHS Global Insight commented that ”The muted wage growth supports belief that underlying inflationary pressures are limited and that the Bank of England has scope to engage in further Quantitative Easing early in 2012 should the economy fail to show significant improvement.” Archer seems to expect lay-offs in the public sector to be the main culprit, adding that, “Consequently, we now expect the number of jobless on the International Labour Organization measure to reach a peak around 2.80m in the third quarter of 2012, which would see the unemployment rate climb close to 9.0%.”
