Spain sinks deeper into the mire

After seemingly interminable days of speculation about grainy photos of dubious-looking ginger things shot with low-quality camera phones, many may have hoped that the return from the bank holiday might have brought something of more interest. Sadly, they were to be disappointed. Speculation about the veracity, or otherwise, of the latest ‘big cat’ sighting may well be perpetuated by the red-tops for a few days longer, but at least the residents of Clacton on Sea have little to worry about – probably. 

Unfortunately for Spain, predictions of its imminent financial implosion seem far closer to the mark, and the local populous have plenty to be concerned about. Spanish GDP fell 0.4% in the second quarter according to final figures that confirmed the preliminary reading – although on an annual basis, growth is falling at a 1.3% pace (faster than the 1% predicted). The austerity measures introduced in response to the debt crisis and rising borrowing costs are only likely to make things worse, and with unemployment approaching 25% it is hard to see where the tax revenues will come from to pay the bills. The conclusion: Spain is probably going to need a bail-out – something that investors made abundantly clear some months ago as they pushed the benchmark 10-year bond yield through the psychological 7.00% level. Anyone wondering who might be next in the firing line may be interested to know that Italy is due to hold an auction of its10-year bonds on Thursday.  

Other than further evidence that Richard Branson hates to lose and that Apple increasingly resembles the ‘evil’ Microsoft empire that it once sought to overthrow, there was precious little to shout about from the financial markets yesterday. German consumer climate data was pretty much where it was expected to be, while the US Conference Board reported that American consumer confidence was even worse than analysts feared. The only other news of any real note showed that the Richmond Federal Reserve district’s manufacturing index was slightly better than forecast, but still comfortably in negative territory. The upshot of all that was for a slightly stronger euro as investors speculated that the deteriorating situation in Spain might force the European Central Bank to finally ‘do whatever it takes’ to solve the debt crisis and rescue the currency. The dollar fell slightly as the chances of QE3 were deemed to have increased.

Unless today brings a grainy photo from the Curiosity Rover of something that might be a Martian – but more likely a rock – we will have to make do with German inflation data, which expected to fall to 0.1% from 0.4%. The first revision to US GDP in the second quarter is expected to rise to an annualised 1.7% from 1.5%. There is also a range of second-tier data that will likely continue to paint a mixed picture. Expect the currencies to continue to be range-bound.

Roll on the end of silly season and next week’s ECB meeting.