EuroZone News

Risky assets advanced this week as economic indicators showed improving growth momentum in China and the US, while the economic recession did not intensify in the eurozone. Optimism about an imminent agreement on a debt-reduction package for Greece also contributed to improve market sentiment. Spain took advantage of more positive market mood and it managed to sell EUR8.8bn in government bonds and Treasury bills, helping sentiment toward risk assets. In this context, negative impact of the French credit rating downgrading was quite mute. Peripheral risk premia narrowed notably across the board this week. Notwithstanding the safe-haven yields rose, the reaction in the short-end of the German yield curve was quite limited. At the end of the week, oil prices fell due to ceasefire agreed between Israel and Hamas, reducing one of the global market headwinds. Finally, Japanese yen is being dragged by expectation of Japanese Liberal Democratic Party expectation to win elections on December 16, which backs an ease monetary policy

- EU finance ministers and the IMF failed again to agree on a debt-reduction package for Greece Creditors led by Germany refuse to put more money or offer debt relief. However, there’s optimism on speculation that European finance ministers are close to finalizing a debt-reduction package for Greece, as soon as next week, at Eurogroup meeting next Monday (Nov 26). Apparently this optimism rests on the fact that policy makers remain positive on the prospects for a deal. German Finance Minister Wolfang Schaeuble said that the issue on how to close the Greek financing gap was solvable: “we have a series of options” and we’ve “discussed the issue very intensively, but since the questions are so complicated we didn’t come to a final agreement.” Meanwhile, Mr. Juncker stopped just short of predicting a deal at next Monday’s meeting by saying that “further technical work on some elements of this package” is needed. Meanwhile, the next aid payment, which has been held up since June, remains frozen until at least next Monday’s meeting. 

- Well-received Spanish government debt auction helped risk sentiment toward risky asset. This week, Spain’s Treasury sold EUR 3.9bn in 3Y bond, 4.7Y bonds and 8.4Y, topping the initial issuance range (EUR 2.5-3.5bn). Yields accepted were in line or slightly below with secondary market yields and lower than in previous auctions. Besides, the Spanish Treasury also issued EUR4.9bn in 12M and 18M Treasury Bills. Average yield at these auctions were below secondary market yields.

• Continuing with positive news, the Portugal successfully passed the sixth review of its aid programme
  - However not all news were positive in Europe this week. Moody’s cut the French credit rating by one notch to Aa1 from AAA, due to the economy's weakness and the risks to the government's finances "posed by the country's persistent structural economic challenges". This movement has increased the downgrade risk of the EFSF. Yet, its negative market impact was offset by optimism about a resolution on Greek woe.

• Optimism on improving growth momentum in China and significant strength in US housing indicators
  - In China, this week brought additional signs of growth stabilization. Particularly, China’s flash PMI jumped above the expansion threshold for the first time in 13 months. China’s Markit/HSBC Flash PMI showed a notable increase to 50.4 in November, compared with a final reading of 49.5 in October, marking the first time since October 2011 that the Markit/HSBC PMI has been above the 50 threshold, which indicates that manufacturing sector activity for small-and-medium enterprises is expanding once again. Together with other recently released macro data from China, the latest Flash PMI points to China’s improving growth momentum. We continue to expect China’s growth to pick up in the fourth quarter and improve further in the first quarter of next year.
  - In the US, existing home sales rose 2.1% to an annualised rate of 4.790 million, the strongest selling rate since the home-buyers tax credit was in effect in May 2010, indicating gains in the real estate market are being sustained by cheap borrowing costs. More notably, housing starts climbed to their highest level since July 2008. Starts rose to an annual pace of 894k (3.6% m/m) in October, up from a downwardly revised 863k in September (initial: 872k) and well above consensus expectations (840K). This significant upshift in housing starts is consistent with this week’s jump in homebuilder sentiment which returned it to 2006’s levels. Albeit housing permits, which fell to 866k in October from 890k in September, suggest some moderation ahead, they had risen 12% in September to a four-year high, which points to improving growth momentum in the housing sector. Other US economic data were mixed. Jobless claims fell as expected, while the University of Michigan’s index of consumer sentiment fell to 82.7 in the final November report (initial: 84.9), which was below consensus expectations. Yet, markets have ignored the mixed data and rally on the positive data as they believe there’s hurricane-related weakness in some data.

• With respect to fiscal-cliff negotiations this week there was renewed optimism. It seems that the Republicans are willing to accept increased government taxes coupled with spending cuts
  - In Europe, there are still no signs of a turnaround but Eurozone PMI’s downfall stabilized in November. The eurozone flash Composite PMI stood at 45.8, slightly up from October (45.7) and somewhat below expectations (BBVA and Consensus: 45.9). Manufacturing was up by 0.8 points but services went down by 0.3 points, both remaining clearly in contractionary territory. After the deep fall observed since March (with an accumulated downturn of 5 points between March and July), Manufacturing PMIs have recovered over 2 points in the last four months, while services continue falling slowly. Although available soft data for Q4 are similar to those for Q3, our model MICA-BBVA forecasts that recession would be larger in Q4 than in Q3 (-0.4% fall for the last quarter, from -0.1%).

Next week: The Eurogroup will meet again on November 26 to further discuss Greece financing needs. On the economic front, in the US several economic indicators will be released such as Personal income and Spending figures for October, the Consumer confidence and the Chicago PIM indexes for November, and the Fed’s Beige book. In Europe, the M3 and CPI for November will be also released.