Business World

Thursday 19 April 2018

Debt crisis: Spanish borrowing costs jump despite central bank action

Mike Peacock, Reuters

POLICY loosening by a trio of major central banks failed to impress investors on Friday, pushing Spanish borrowing costs back up to unsustainable levels reached before last week's EU summit took measures designed to ease pressure on them.

China, the euro zone and Britain all loosened monetary policy on Thursday, signalling growing alarm about the world economy. But to little avail.

The euro stayed close to a five-week low against the dollar after an interest rate cut by the European Central Bank further dampened the common currency's appeal, while Brent crude oil shed more than a dollar to drop below $100 a barrel.

A U.S. jobs report, due at 1230 GMT, is the day's big number and will gauge the extent of damage the euro zone's debt crisis is inflicting on the U.S. economy and whether the Federal Reserve may consider more action when it meets next at the end of the month.

"If non-farm payrolls are strong enough to suggest there will be no QE from the Fed, the dollar will strengthen. If they are weaker then the dollar will fall as the Fed will just be playing catch-up with the rest of the world," said ING head of currency strategy Chris Turner.

Thursday's robust U.S. private employment data came in strong but a Reuters poll showed expectations were for non-farm payrolls to expand by just 90,000 jobs in June.

Spanish 10-year government bond yields extended their rise past 7 percent, a level which is not a sustainable borrowing rate indefinitely.

If Madrid requires a full sovereign bailout on top of the up to 100 billion euros already earmarked for its banks, it would stretch euro zone rescue funds to the very limit.

Italian yields climbed above 6 percent.

The pan-European FTSEurofirst 300 index was down 0.2 percent at 1,042.04, but was still up more than two percent for the week.

Reflecting the impact of the European Central Bank's decision to cut lending rates to 0.75 percent and deposit rates to zero, German government bond yields were weaker with the yield on two-year debt briefly turning negative.

U.S. stock index futures pointed to a slightly lower open on Wall Street, with futures for the S&P 500, the Dow Jones and the Nasdaq 100 down 0.1 to 0.2 percent.

A weaker session in Asia, where Chinese growth worries are on the rise ahead of Q2 GDP data next week, pushed the MSCI world equity index down 0.15 percent to 313.85, though it is on track for a gain of 0.6 percent this week.


Japan's Nikkei share average also fell with investors unconvinced Thursday's tripartite monetary easing will jump start slowing global growth.

International Monetary Fund chief Christine Lagarde said the world economic outlook had deteriorated as both developed and big emerging nations show signs of slowing down.

China surprised markets with its rate cut, coming just four weeks after a previous reduction and ahead of economic data next week that includes second-quarter gross domestic product. It fed expectations that those figures will be weak.

Vice Premier Wang Qishan said in comments published late on Thursday that China would have difficulty meeting its 10 percent trade growth target this year.

Crude oil fell below $100 a barrel on expectations the Norwegian government would end an oil workers' strike and as enthusiasm over central bank rate cuts waned.

"The focus continues to be on the global economy and oil demand," said Victor Shum, a senior partner at oil consultancy Purvin and Gertz. "China's rate cut was a surprise and although it was meant to stimulate, it was interpreted as a sign of more trouble in the economy and it didn't really inspire."

Gold edged down as a stronger dollar hurt European appetite for the metal but remained on track for a second week of gains and as investors waited for U.S. jobs data.

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