A Quiet Day in Europe - Most markets closed for Easter Monday

By FX Empire Analyst - Barry Norman
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The ECB left rates on hold at 1% as expected at its meeting last week in Germany. Despite some lackluster economic data, a moderate recovery is expected in the course of the year.

 The weakness in Germany’s output indicators is probably due in part to firms’ efforts to reduce inventories. Order books, while remaining well above their long-term average, are languishing way below the levels reached a year ago. With large eurozone countries such as Italy and Spain in recession and slow growth in other export markets, the softness in German orders is hardly surprising.

Against the backdrop of both weak macroeconomic data and renewed concerns about sovereign credit risk, both the euro and the euro shares markets  weakened significantly. 

The Stoxx dropped 3.4 %  to close at 2,392 last Friday. The euro currency followed suit to lose 1.77 percent, closing at $1.31. Spain was again a drag on the stock market falling close to September 2011 lows. Markets have been closed since Friday for the Easter holiday with most remaining shuttered on Monday also.

Spain tried to sell bonds with a four- and eight-year maturity last Wednesday and the auction was widely considered to be a failure with only 2.6 billion euros ($3.40 billion) sold instead of the targeted 3.5 billion euros ($4.58 billion). Interest rates were much higher than the previous auction and banks tendered fewer bids in total. 

The cost to insure Spanish debt with a credit default swap (CDS) immediately rose to 457 basis points (4.57 percent), meaning the cost to insure a Spanish bond of $1 million in principal would cost $45,700 per year. That rate is the highest since late November 2011. The 10-year benchmark government bond yield also rose to levels not seen since early January, reaching 5.68 percent in the process. 

While Spain’s bad credit fundamentals and latent risks—rising debt to GDP levels, unofficial and unrecorded debt, high unemployment, under reversed banking systemare mostly known and understood by the market, there was no new announcement that triggered the failure in the bond auction.

The latest money and credit data published by the ECB showed that eurozone banks in the three months to February bought a total of 114.9 billion euros worth of government bonds, with Spain (67.9billion euros) and Italy (54.2billion euros) being the net buyers while banks in other countries were net sellers. With the ECB unlikely to announce further operations of these kind markets have been left wondering who will be the net buyers of government bonds moving forward.

This week will be light on economic data for the eurozone, but trade figures for Germany and industrial production for Spain are coming up. 

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