Unemployment in the Eurozone region rose to a record 10.4 percent in December of last year. Spain was the hardest hit of the 17 countries at 22.9 percent unemployment while Austria has the lowest unemployment rate of 4.1 percent.
Guillaume Menuet, economist at Citigroup, said he expected the number of people out of work to increase throughout 2012.
“If you think about the direction of employment expectations that you see across various business surveys, the outlook for employment doesn’t look particularly enticing, simply because the uncertainty is very high. In many cases you find firms continuing to delay investment projects. For those that are still making profits, hiring is being frozen, and for those which are under pressure to hit results or losing money, job losses are becoming the only solution that they have,” he said.
The EUR 1.32 handle was to be in the distant past. One Euro summit later, in tandem with month-end requirements, and we have a trading environment wishing to finally throw some volume about and a ‘lost’ currency finding some of its mojo again. The dollar seems to have suffered the opposite fate over the last trading session, under-performing against its peers in response to the relatively constructive outcome from yesterday’s flash EU summit in Brussels (the sixteenth in two years). It seems to be in the post summit, with reluctance, that the bears have been covering some of their longer term short EUR positions. The explanation that the Greek situation may be getting better is an explanation to fit the price action or is it the US, IMF and the Euro-zone working to combine the ESM and EFSF into a superfund with +EUR1.5t the reason?
Investors have tentatively welcomed the EU leaders agreement on a higher fiscal pact to be signed off next month, and a bailout mechanism that will come into effect in July. However, a black cloud still exists over proceedings. Portugal’s 10-year government yield (+16.29%) remains elevated and there is still no agreement between Greece and the private sector. The market is again concerned that the Portuguese will require another Greek style bailout if their government is unable to access the capital markets for ‘route one’ funding requirement. The country’s yields have ballooned since credit rating agencies lowered their ratings to below sub-investment grade earlier this month. Just like the other members of the peripheries, investors remain skeptical that the PSI in the Euro-zone sovereignty will only be applied to Greece.
However, in this moment, the summit is being viewed as a success relative to modest expectations. Belief like this has eliminated some of the event risk for the Euro-system. The bears will argue that the various asset classes have priced in a successful outcome already given the rallies across the board over the past week. With the Greek PSI agreement remaining elusive, this again can create enough market anxiety, reminding us that yesterday’s EUR level lows are only but a few trades away. The uncertainty over the extent of actual participation in the debt swap has the market again wanting to fade rallies in the EUR, especially as we approach the employment reports. Fear that other Euro financing stress issues, coupled with the regions deteriorating growth dynamics, may again urge monetary authorities to apply further easing.
Besides Greece, the market is beginning to focus on US employment data later this week and on the dynamics of BoJ and SNB own unique currency situations. Both authorities are on the verge of intervention. The Fed’s decision to extend its contingent commitment to low rates into late 2014 reinforces the markets bullish view on the yen. The EUR/CHF itself is only a touch above the official floor as investors risk aversion appetite comes into question with so much Euro sovereign uncertainty. In the big picture, 1.3250 remains the key resistance zone, but sustaining a break into the 1.32 must first be cemented.
As part of the Davos World Economic Forum, UK Prime minister, David Cameron is urging his EU counterparts to follow Britain’s example. In his words: “In Britain we had to be bold”.
In a message to his European counterparts, Mr Cameron argued his government’s efforts to tackle its deficit had “earned credibility and got (the UK) ahead of the markets”, and eurozone leaders should now take similarly decisive action.
The eurozone crisis was “weighing down business confidence and investment” across Europe, he said, and EU leaders had to “to show the leadership our people are demanding”.
“Tinkering here and there and hoping we’ll drift to a solution simply won’t cut it any more,” he said.
Yesterday, the Federal Open Market Committee (FOMC) statement extended the current near-zero interest rate policy another year to the middle of 2014. The FOMC also addressed the resumption of the Fed’s bond buying program.
The Federal Open Market Committee “recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation,” Bernanke said yesterday at a press conference in Washington.
The Eurozone received a little positive news for a change today when it was announced that Germany’s unemployment rate fell to the lowest level since 1991. For December, unemployment fell from November’s 6.9 percent recording to 6.8 percent.
A strong German economy is seen as being vital as the Eurozone struggles to contain a debt crisis now sweeping several countries including larger economies such as Spain and Italy.
Eurozone banks have rushed to take out cheap three-year loans offered by the European Central Bank, borrowing 489bn euros ($643bn; £375bn). The central bank had originally hoped to lend up to 450bn euros to stop another credit crunch crippling the banking system.
“The very heavy take-up of the ECB’s three-year, long-term refinancing operation provides some encouragement that banks’ liquidity needs are being amply met,” said Jonathan Loynes at Capital Economics.
“But while this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too as banks use the funds to purchase large volumes of peripheral government bonds.”
‘Positive number’
Weaker global demand for China’s exports due to a slowing global economy continues to drag down China’s manufacturing totals. In November, China’s manufacturing fell to a 32-month low of 49 on the Purchasing Manager’s Index.
“The November PMI dropped further to below the boom-bust line of 50… indicates that the economic growth pace would continue to moderate in the future,” said Zhang Liqun, a researcher with the Development Research Centre of the State Council.
The Organization for Economic Cooperation and Development (OECD) revised downwards its growth outlook for the Eurozone countries. The OECD predicted the eurozone economy would shrink in the fourth quarter by 1 percent, and by 0.4 percent in the first quarter of next year.
The technical definition of a recession is two consecutive quarters of negative growth and by these standards, the OECD also predicts a recession for the UK with a 0.03 percent contraction for the 4th quarter, and a 0.15 percent contraction for the first quarter of the new year.
China’s Purchasing Manager’s Index (PMI) fell to its lowest reading in almost three years in November. Weaker demand for China’s exports in the U.S. and especially Europe continues to impact China’s manufacturing sector.
“Though a less-than-50 figure was expected, it suggested that China is no exception and is being hit by the euro crisis and global uncertainty,” said Conita Hung, an analyst at Delta Asia Financial Group.
There are signs that the long string of depressing news from the Eurozone is starting to have an effect on the region’s main economy. A sale of German bonds earlier today was marred by weak demand and higher yields and in the end, the Bundesbank had to withdraw nearly half of the 6 billion euros ($8.1 billion) worth of bonds slated for sale.
The poor showing comes just one day after Fitch Ratings released a report suggesting that France was on the verge of losing its triple a rating. As a result, the euro declined to $1.3385 just before 9 am in New York.
