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Weekly Market Review – The Numbers of the Beast

Weekly Market Review for Week Ending 6th of April 2012

Is the Eurozone crisis rearing its ugly and unwelcome head once again? In reality, it was never likely the beast would lie dormant for long, but it does seem as though investors had rather forgotten about its ability to spook the markets.

This time the pain has been in Spain, with the country’s latest debt auction showing waning demand for its government bonds. Spain had hoped to sell €3.5bn (£2.9bn) of bonds, but could only find buyers for €2.6bn. Yields also rose – a bond maturing in 2020 yielded an average of 5.34%, which is higher than forecast and also than last September’s auction. Yields have risen even further since, with the 10-year bond now yielding 5.95%.

This is in spite of a new round of austerity measures, incorporating €27.3bn in government cuts and tax rises, that was presented to parliament at the start of April. Representing the largest budget cuts for more than 30 years, these have provoked widespread civil unrest but, as yet, have done nothing to bring down Spain’s borrowing costs.

The market’s response has been swift. The Spanish market is now approaching three-year lows while the repercussions of its weakness have been felt in stockmarkets across Europe. Having looked like it might sneak above 6,000 earlier in the year, the FTSE 100 is now down around 5,600. Conversely, the latest developments could see another run in the gilt market.

Of course, markets are not simply responding to the problems in Spain. Eurozone unemployment rose for a 10th consecutive month to reach a new euro-era high. Joblessness rose by a seasonally adjusted 162,000 to 17.1m in February. The strength of the US’s recovery has largely been generated on the back of an improvement in employment statistics. Without this, the Eurozone seems condemned to continued economic weakness.

Businesses have reported similarly disappointing figures. Markit’s Eurozone Composite Purchasing Managers Index (PMI) slipped to 49.1 in March and thus below the 50 mark that divides growth from contraction, indicating the Eurozone is still firmly in recession.

Perhaps most worrying is the weakness of the major European powers. Growth has slowed to a three-month low in Germany, while France reported its first contraction for four months. Ireland was the only bright spot – and at least its experience shows countries can emerge from austerity measures intact. Even so, the other Eurozone countries still look to have a long haul ahead.

Some commentators seemed to have been growing a little complacent on the Eurozone crisis, suggesting the problems were at least known and understood. In this, they may have underestimated the beast’s power to bite back.

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