European bourses declined for a fifth consecutive day, to their lowest level in 2014 as the banking turmoil in Portugal took center stage. Banco Espirito Santo SA led the way in losses as its stock sank 16% on news that Espirito Santo International SA could be requesting for bankruptcy protection in Luxembourg should it be unsuccessful in reaching a debt renegotiation agreement with its main creditors. Banque Privee Espirito Santo suspended trading its bonds and shares today following its inability to make payments of some of the last maturities of short-term debt securities issued by Espirito Santo International. The pressure from the banking sector has led yields in Portugal to rise from their 3.2% low in June to 4.0% today.
In fundamental data from the euro zone, economic readings for industrial production in Italy and France disappointed at -1.8% y/y and -3.7% y/y respectively and highlight concern about euro zone growth for the second quarter. Further, deflation risk is accelerating for France with headline consumer rising only 0.%% in June on an annualized basis, below the 0.7% anticipated. This may place further burden on the ECB to ease monetary policy in the near term.
The pound has retreated from an intraday high of 1.7166 to trade slightly about the 1.7100 handle as UK trade deficit widened to £-9.204 billion in May from £-8.812 billion in April, largely attributed to weaker exports to the EU which represents just over half of UK exports. The Bank of England in its interest rate decision maintained rates at a record of low of 0.5% and the size of its asset purchase facility at £375 Billion. Despite Bank of England Governor Carney’s hints last month that the BOE may raise interest rates “sooner than markets currently expect”, today’s statement suggest that members of the MPC would need evidence that there is less slack in the economy before voting for a rate hike. A key area that will be scrutinized will be wage growth which has lagged despite subdued inflation. The composition of voting members within the central bank could prove important as the bank has recently replaced a known hawk, Spencer Dale with Andy Haldane who warned of the risks of embarking on a quantitative easing program. Two other members that will participate in the policymaking board next month include Nemat Shafik and Kirstin Forbes, who are relative unknowns.
As we head into the North American session, yesterday’s release of FOMC minutes has proven to stabilize markets as disappointing data from China and euro zone has weighed on indices. Trade figures from China released overnight, was much lower than estimates at $31.6 billion with exports and imports both missing the mark. Exports rose 7.2%, against consensus of 10.6% and imports climbed 5.5%, missing expectations of 5.8%. A slower than anticipated recovery could propel the Chinese government to inject more stimuli into the economy.
FOMC minutes acknowledged improvements in the labor market, alluded that the risks to jobs, growth and inflation were broadly balanced and confirmed that quantitative easing will end in October with a final $15 billion reduction in asset purchases. In economic data, jobless claims declined to a near seven year low of 304,000 from 315,000 the previous week. Later this morning, we will see the release of May Wholesale inventories expected to rise 0.6%.
The Canadian dollar is soft but continues to trade within its recent range, pressured by global outlook for the second quarter. In domestic news, New Housing Price Index declined to 0.1% from 0.2% in May month-on-month, with markets turning their attention to tomorrow’s employment report and next week’s Bank of Canada meeting. Sentiment for USD/CAD has not turned bullish, though a combination of lower oil prices, weaker global growth outlook for Q2, increasing US-CN two year spread and decreasing pressure on the Bank of Canada to tighten policy, could suggest loonie weakness going forward.
Ffurther reading:
US jobless claims drop to 304K – slightly better than expected
Share
