Member Article

Germany’s AAA rating threatened as crisis deepens

In contrast to yesterday’s severe sell-off, markets opened mostly flat this morning.

Recession in Europe return as euro-zone’s Manufacturing Purchasing Managers’ Index (PMI) became smaller today (Tuesday) and hit a 37-month low, reducing from 45.1 in June to 44.1 in July. The euro-zone’s PMI Composite Output Index, which includes the service and manufacturing activity, shrank for a six month in July. A reading above 50 indicates expansion in the region, with a figure below 50 pointing towards a contraction. The French and German manufacturing PMI that contributed to tge above decreased to 43.6 from 45.2 and to 43.3 from 45.0, respectively, highlighting how the downturn in Greece, Spain and Italy has become entrenched in the core countries. Growth in the region is anticipated to fall in the second quarter, with GDP suggested to fall 0.6% in the period according to Moody’s.

Further evidence of trouble in Germany was in the position of their triple-A credit rating which was lowered to a negative outlook by Moody’s over night. The agency said that “the country was at risk from the increased likelihood of a Greek exit from the euro and the need to provide more support to Spain.”

Whereas Europe’s PMI indices shrank, HSBC’s Flash China manufacturing PMI rose to 49.5 in July from 48.2 in June to its highest level since February. Analysts have suggested that this increase was a result of the easing of monetary policy by the Chinese authorities, which has resulted a turnaround or potential bottoming of the economic situation.

The darkening outlook in Europe caused the euro to continue its falls against the Dollar and declining 0.3 percent against the safe-haven Japanese yen to 94.70 on early trading. It must be noted however that the single currency has recovered from the 12-year low of 94.23 reached in yesterday’s trading session.

Spain earlier sold € 3.04bn of 3 and 6-month T-bills at a government bond auction today, selling slightly more than targeted (between 2 and 3 billion euro). Spain paid an interest rate of 2.434% and of 3.691% to borrow funds for three months and six months respectively which was higher than at previous auctions. The concerns were also reflected in the yield of 10-year bonds, nudging even higher to a new record high of 7.601 % in the secondary market.

The FTSE closed down 0.63%, having traded relatively flat in the morning, it appears rumours of Catalonia requesting assistance from Madrid sent stocks lower towards the end of the trading day. The Spanish IBEX, under a short selling ban as of yesterday, closed 3.3% lower on the news.

This was posted in Bdaily's Members' News section by James .