- Negative sentiment in Europe, reflected by Spanish yields reaching new highs, carried over to US equities. The S&P500 ended down by 0.9%. In Asia stock indices are trading in negative territory this morning. Nikkei is down by 0.2%. US bond yields in longer maturities closed at new lows as one option for the Fed next week could be to extend the policy guidance into 2015. In FX markets the EUR/USD has increased slightly overnight and is this morning trading around 1.213.
- Moody’s lowered its outlook on Germany, the Netherlands and Luxembourg to negative last night. The rating agency said “The continued deterioration in Spain and Italy’s macroeconomic and funding environment has increased the risk that they will require some kind of external support.” Finland’s AAA rating was affirmed with a stable outlook, see Moody’s.
- China’s HSBC manufacturing PMI index was released this morning and showed an increase from 48.2 in June to 49.5 in July. Despite the still downbeat level, the figure marks a five-month high.
- Focus today will continue to centre on developments in the Spanish sovereign bond market. It will also be interesting to see the reaction in German and Dutch bonds after the move from Moody’s. The Netherlands will be tapping the market in 2 and 16 years while Spain will be selling bills today. Yesterday, shorter dated Spanish yields in particular rose sharply but the 10-year yield also reached a new high and closed at 7.39%. Spain’s stock market regulator has banned short selling for at least three months. In addition, LCH Clearnet raised the margin it requires on some Spanish and Italian government debt further, see FT. Speculation on what it will take before the political leaders activate the EFSF/ESM is likely to be revived in the coming days. Note also that the Spanish finance minister will meet with his German counterpart in Berlin today.
- In the European session, the main releases will be French, German and euro area PMIs. The leading soft indicators have stabilised recently but remain at downbeat levels consistent with recession. We expect broadly unchanged readings today despite our models suggesting some improvement. Both ZEW and Sentix have dropped in July. Most leading indicators models have a hard time capturing the effect of elevated financial stress that is fuelled by a fragmented banking system. In the US, the main release is the US Markit PMI. Last month a minor decline was not in line with the plunge in the ISM, so it will be interesting to see which figure will deliver most of the "error correction."
- There are no market events in Scandinavia today.
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