UK GDP set to slip further as Europe crumbles

andres del risco

“Turnaround Tuesday” never came. In fact we couldn’t even get a “Stimulating Session” with the same stories dominating markets, leaving investors and traders nervous to do anything.

Headlines out of the Eurozone were numerous, shambolic but wholly unsurprising. Another Spanish region, Catalunya, stated yesterday that it would ask the Spanish government, in time, for financial assistance. This brings the total to 4 so far and includes a lot of the larger provinces as opposed to those who you would originally think may get into trouble.

Yesterday’s Spanish bill auction was read from the same script as previous have been; demand was ok while yields continued higher and pressure remained all along the yield curve, driving the cost of borrowing higher at both the short and long end. Spain’s 2yr yield this morning has risen above 7% for the first time in the Euro area – a deeper recession in Spain is inevitable.

The pressure on Italy increased a lot more yesterday as well. The spread between the yields on Italian 10yr and that of Germany widened i.e. deteriorated by 19bps yesterday while the same measure of Spanish debt only rose by 6bps. Contagion is now in Italy once again and their yields will continue to move higher while politicians and central bankers remain silent on the issues at hand.

EU officials were not silent on Greece yesterday. According to Reuters, officials came out yesterday to say that Greece will miss its EU/IMF debt reduction targets and that further debt restructuring would be necessary. This will come as a surprise to exactly nobody and we can expect further headlines from troika officials over the coming week to suggest that Greece is spiralling closer to catastrophe without further assistance.

The effect on euro was fairly muted with other risky assets also getting hurt. As soon as the market sees the contagion move from Spain to Italy for example, then it no longer just sells the euro but looks to all around haven trades; getting long of JPY, USD and gold.

Overnight markets were not helped by the slip in Apple’s share price following the publication of its latest quarterly results. The stock is seen as a bellwether for consumer spending and confidence and missing guidance saw the share price dip 5% in the post-market last night. The heavily tech orientated Asian markets have dipped as a result as well and European markets will open in the red too.

Sterling continues to remain valiantly strong against the euro. We get the first estimate of UK GDP for Q2 today. The consensus is for a dip of 0.2% but I think that’s too high. Retail spending, investment and manufacturing output have all disappointed and the bounce back in confidence from jubilee spending has proved to be non-existent. Our tracking suggests a figure of -0.3% should be about right and we think sterling could dip in the aftermath. The release is due at 09.30 BST

Elsewhere, German IFO business climate is set to dip further to over 2yr lows. Yesterday’s PMI releases from the French and German manufacturing sectors were poor and continues the trend of gradual deterioration in European confidence. We’ll see at 09.00 BST.

Indicative Rates Sell Buy
GBPEUR 1.2818 1.2846
GBPUSD 1.5518 1.5545
EURUSD 1.2094 1.2119
GBPJPY 121.33 121.61
GBPAUD 1.5135 1.5163
GBPNZD 1.9773 1.9803
GBPCAD 1.5814 1.5844
NZDUSD 0.7840 0.7860
GBPZAR 13.18 13.23
USDZAR 8.4810 8.5223
GBPPLN 5.3934 5.4289
EURJPY 94.44 94.73

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