Euro leaders embrace austerity

Mariano Rajoy enjoys the finer things of life. This week the Spanish prime minister was spotted in New York smoking a big fat Cohiba. In June, flying back from Spain's opening match of the European football championship (Spain 1 - Italy 1) in his private plane Sig Rajoy and five chums tucked into turbot and filet mignon. They also imbibed a good deal of strong drink, the quantity of which has become ever more epic with the retelling. It started off three months ago as seven bottles of wine and ten beers. The latest call includes another 17 bottles of wine, four of whisky, two of gin and one of vodka. And that was after a one-all draw. Goodness knows what they must have consumed on the way home from the final match in Kiev, where Spain beat Italy 4-0.

A €1,000 in-flight meal and a fancy cigar are not the best possible PR for the prime minister in austerity-strapped Spain but it is easy enough to understand his need for Dutch courage. Yesterday he announced another €40bn of spending cuts and a third year of frozen salaries for public sector workers. The suspicion is that Sig Rajoy is hoping these new measures will be enough to prevent the imposition of even tougher terms when Spain applies for its bailout.

Whatever his citizens might have thought, investors were impressed by the prime minister's policy. They saw it as a step closer to the bailout which, they still believe, will solve the problems of Spain and the eurozone. In the last 24 hours the euro has strengthened by a third of a US cent and held firm against the yen.

Sterling has done even better, rising by three quarters of a US cent and quarter of a euro cent. It is fractionally firmer against the yen and the Canadian dollar, steady against the Aussie. The Scandinavian crowns and the New Zealand dollars did well, all strengthening by three quarters of a NZ cent or equivalent against the pound. 

Sterling received a boost when the second revision to second quarter UK gross domestic product (GDP) lifted the figure from -0.5% to -0.4%. Although minus anything is an unhappy result there was relief that the revision was an upward one. It was a different story after lunch when the revision to American Q2 GDP lowered growth from an annualised 1.7% to 1.3%. In quarterly terms that is 0.3% instead of 0.4%. The news helped ensure a comprehensively poor day for the US dollar, which lost ground almost everywhere. Removing any possible hesitation among the dollar-sellers, US durable goods orders fell by -13.2% and pending home sales by -2.6% in August. 

The pound received theoretical assistance overnight from an incremental improvement in Gfk's index of consumer sentiment. There are no other UK statistics today. Japanese deflation at an annual -0.4% and another month of falling industrial production had no visible impact on the yen. The annual increase in Australian private sector lending was steady at 4.1%. 


German retail sales and the provisional Euroland inflation reading are the main figures this morning. After lunch come Canadian GDP for July and a smattering of US data; personal consumption and spending, the Chicago purchasing managers' index (PMI) and the Michigan consumer sentiment index. In between the data releases investors' attention will be on French President Hollande, who will announce a €30bn package of spending cuts and tax increases. Yesterday's self-imposed Spanish austerity did the euro no harm; there is no reason to suppose today's French effort will be any worse for it. Have a good weekend.