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Spain, Italy borrowing costs hit fresh lows
AFP JULY 29, 2014 4:30AM

Interest on Spanish and Italian debt has fallen to record lows while Portugal's continues to drop as investor concerns about the eurozone's former laggards eases.

Borrowing costs for southern European countries have fallen since the European Central Bank brought in unprecedented measures in June to help boost weak inflation in the bloc.

Investors have also been cheered by upbeat data, particularly in the bloc's fourth-largest economy Spain, which expanded at its strongest rate for six years in the second quarter.

"The fact that these rates continue to decline and there is no reversal shows that nobody sees issues that are likely to push yields higher," said Patrick Jacq, a bond strategist at BNP Paribas, on Monday.

Spanish 10-year bonds sank to 2.488 per cent, a record low for the secondary market where investors trade existing debt, down from 2.541 per cent on Friday.

Italy's borrowing costs also touched a new low of 2.666 per cent, down from 2.714 per cent.

The improving sentiment marks a sharp turnaround from recent years when investors feared Spain and Italy could join Greece and Portugal in needing an international bailout.

Sentiment towards Portugal has also improved in recent weeks after its credit rating was upgraded by Moody's ratings agency thanks to its improving public finances.

Portugal, which exited its own 78-billion-euro ($113.61bn) international bailout in May, has seen its borrowing costs fall as a result, sinking on Monday to 3.570 per cent, from 3.640 per cent Friday.

"The market accepts that the country is moving away from a critical situation," Mr Jacq said.

Euro zone inflation falls again amid deflation fears
Matt Clinch | @mattclinch81

Euro zone inflation fell more than expected in July, according to new figures released on Thursday, sparking renewed fears that the region could be heading for a period of deflation.
Official flash figures showed that inflation rose by 0.4 percent compared to the same period last year, failing to match expectations of 0.5 percent in a Reuters poll. It is the lowest level seen since October 2009 and below last month's reading of 0.5 percent. Energy prices were the biggest drag on the figures, according to the estimates, with the cost of food, alcohol and tobacco also slipping in July.

edestrians carry shopping bags while walking in the Harlem neighborhood of New York.
Craig Varga | Bloomberg | Getty Images
edestrians carry shopping bags while walking in the Harlem neighborhood of New York.
The euro zone data follow some disappointing figures on Wednesday, which saw Spain slide into deflation - where the growth in consumer prices turns negative and begins to fall. Germany - considered to be the powerhouse of the region - saw its rate of inflation slow to 0.8 percent, following on from last month's reading of 1.0 percent.

Analysts at BNP Paribas called the flash reading a "new cyclical low" and said they expected it to remain around current levels over the next couple of months, with risks tilted to the downside.
Read MoreNew hope for euro zone as yields hit record lows

The European Central Bank (ECB) sees inflation as a key metric in gauging the state of the euro zone, and announced a slew of measures back in June to try to spur on the region's flagging economy. Many analysts fear deflation could lead to a downward spiral, with consumers holding off on purchases in the expectation that prices could fall further. Others see deflation as a natural rebalancing within the region, believing that consumer prices need to slide to counterbalance an overly-strong euro.
Mario Greco, CEO of Italian insurance company Generali, told CNBC on Thursday that the euro zone is "probably" already in state of deflation.

"The European situation is quite concerning," he said. "I mean the labor situation in all of Europe, you know, is not moving. It's not moving good at all."

Read MoreEuro zone business activity rebounds, France lags

Some have accused the ECB of acting too late to tackle the risk of deflation, with most of its stimulus measures not expected to kick in until later this year and little chance of the central bank announcing new measures in the meantime.

Daniel Tenengauzer from RBC Capital Markets backed this view, telling CNBC that there was now a clear divergence between the data coming out of Europe and that from the U.S. "It will take some time before policy makers in Europe actually take another step," he said.

The next few months will increase pressure on ECB President Mario Draghi, according to AvaTrade Chief Market Analyst Naeem Aslam, who said it will be difficult for Draghi to fight the argument that they need more time to see the impact of new measures.

Read MoreShares in Portugal's troubled bank tank 50%

Howard Archer, an economist at IHS Global Insight, added that there is a very real risk that euro zone consumer price inflation could go lower still. Although an appreciable rise in oil and gas prices resulting from geopolitical factors could prevent this, he said.

"We still expect the euro zone to avoid overall deflation," he said in a morning note. "The downward pressure on inflation coming from year-on-year falls in energy prices and sharp food price disinflation may well be drawing to a close."
Italy's youth unemployment hits 43.7%

Italy's unemployment rate fell in June, to its lowest level in 10 months, due to job gains mainly among women, national statistics institute Istat reported on Thursday, while the youth jobless rate reached its highest level in 33 years.

The official jobless rate slipped to 12.3 per cent in June from the 12.6 per cent the previous month, Istat said, citing preliminary seasonally adjusted data. It added 0.1 percentage point from June 2013.

The youth unemployment rate for those aged 15 to 24, a politically hot subject in the country, climbed to 43.7 per cent in June. The rate represented a 0.6 percentage point increase on the month and a 4.3 percentage points rise on the year, Istat said.

The youth employment rate is the highest since the start of Istat's series, on a quarterly basis, in the first quarter of 1977, said another Istat official.

"Youth unemployment remains difficult but keep in mind that [in June] less young people looked for work," an Istat official said.

Meanwhile, some 41,000 jobs for working-age women were gained since May, while men added 9,000 positions, according to the data.

Taming Italy's high unemployment rate is among the priorities of Prime Minister Matteo Renzi's government as household spending remains weak and families are concerned over possible job losses. An elusive economic pickup isn't decisively reversing the jobless rate.

Italy's employment rate, the percentage of working-age adults with jobs, advanced to 55.7 per cent from 55.6 per cent a year earlier, while the jobless ranks increased by 0.8 per cent to 3.15 million, Istat said.
Moody's upgrades Greece rating
AFP AUGUST 04, 2014 3:15AM

Moody's has raised troubled Greece's credit rating by two notches, citing improvements to the government's finances and its commitment to further gains.

Moody's set its new rating for Greece on Friday at Caa1 with a stable outlook, up from the previous Caa3, still well in "junk" territory but a significant mark of progress as the country struggles to emerge from crisis.

The ratings agency said it expects Greece's debt burden to peak this year, at 179 per cent of GDP, and begin slowly falling as the economy begins to expand.

Greece will also meet the target for a primary budget surplus of 1.6 per cent this year set by its bailout lenders, the International Monetary Fund, the European Central Bank and the European Commission.

"The government's progress in fiscal consolidation under its economic adjustment program underscores the improvement in the debt trajectory," it said.

"Moody's considers that Greece's fiscal outlook is more resilient than in the past, given the improvement in the debt affordability."

Greece's economy has continued to contract this year, shrinking at a 0.9 per cent pace in the first quarter, but Moody's said this is better than expected and a great improvement on the 2013 contraction of 6.0 per cent.

By the end of the year, it expects the economy will have expanded 0.4 per cent and pick up to 1.2 per cent growth next year.

The agency also acknowledged that while the structural reforms mandated by the troika of official lenders have only shown mixed results, the government's efforts to reform the labour market and some product markets have made "good progress."

"These reforms have led to wage and price adjustments, which far outstrip adjustments elsewhere in the euro area periphery," it said.

ECB 'won't move a muscle' despite deflation fears
Katrina Bishop | @KatrinaBishop

The European Central Bank (ECB) is expected to hold fire at its monetary policy meeting this week, despite a shock fall in inflation reigniting deflation concerns.

It came as something of a shock to most economists – and likely the ECB – when official figures released last week showed that euro zone inflation fell more than expected in July.

Sean Gallup | Getty Images
Inflation rose by 0.4 percent compared to the same period last year, failing to match expectations of 0.5 percent. It was the lowest level seen since October 2009 and below last month's reading of 0.5 percent.

Read MoreIMF's Lagarde urges ECB to consider QE
The region's continuing sluggish growth saw the ECB unveil a host of measures at its June meeting designed to give the euro zone's recovery a boost.

But July's disappointing inflation data has boosted concerns that the region is heading towards a period of deflation, with even French President Francois Hollande telling Le Monde newspaper on Monday: "There is a real deflation risk in Europe… The ECB must take all the necessary measures to inject liquidity into the economy."

Despite calls for action by Hollande and numerous economists, ECB President Mario Draghi is unlikely to unveil any further stimulus at the bank's policy meeting on Thursday, as he waits for June's interest rate cuts and a new loan program – dubbed the TLTRO - to take effect.

Read MoreDraghi announces host of stimulus measures
"The ECB seems bound to not move a muscle at the Thursday meeting following June's easing package, whose centerpiece (the TLTRO program) starts in September," Daiwa economists said in a note.

"But last week's renewed drop in euro area inflation… is certainly starting to squeeze the Governing Council's ability to put up a united front, stick to their guns and simply hope for the best."

Beyond these inflation figures, however, data for the euro zone has painted a mixed picture in recent weeks.
The closely-watched composite Purchasing Managers' Index from Markit, for instance, came in at 53.9 for July on Tuesday. This was below flash estimates of 54, although it marked an uptick from June (with a reading above 50 indicating expansion).

Retail sales, meanwhile, grew at their fastest annual pace in seven years in June, according to separate data released Tuesday. Sales rose by 2.4 percent year-on-year in June, way above estimates of 1.2 percent, and met expectations on the month, rising by 0.4 percent.

It came after a marked drop in joblessness across the euro zone in June, with the unemployment rate falling to a 21-month low of 11.5 percent.

Read MoreECB surprises with meeting changes, minutes
Howard Archer, chief European economist at IHS Global Insight, stressed that this data "dilutes some of the pressure for any further near-term ECB action."

More good news for the ECB comes in the guise of a weaker euro, whose rise against the dollar over recent months had seemed unshakeable. Between the start of January 2013 and its recent peak in March 2014, the euro had risen over 5.5 percent. Since this peak, it has slipped close to 3 percent.

A stronger euro makes euro zone exports more expensive in the global market, thereby hindering the euro zone's efforts to grow and regain its competitiveness.

"The ECB's Governing Council will be pleased to note that the persistent strength of the euro finally appears to be giving way," Anatoli Annenkov, senior European economist at Societe Generale, said in a research document

"While the exchange rate is not a target for the ECB, the euro strength over the past year has undoubtedly not been helpful in an environment of decelerating food and energy prices, as well as weak demand."

But although the pressure may be off the ECB – for this month at least – the central bank can't rest on its laurels, according to Rabobank economists.

"Recent measures have shielded the euro zone periphery from what could have been a much more significant widening pressures in the face of rising market volatility, but they may offer only a temporary reprieve," they wrote in a note.

"Recent data releases in the euro zone and rising geopolitical concerns certainly point at heightened downside risks for the second half of this year."
At the peak of Euro Crisis, Dax hit 5000, so a correction of this magnitude is certainly welcome...

German correction: DAX falls 10% from June
Katy Barnato | @KatyBarnato

Germany's benchmark stock index entered correction territory on Wednesday, hitting a low of 9030.72 points—10.15 percent down from a high point on June 20. Strategists blamed the worsening situation in Ukraine, and weak data out of Germany.

The DAX recovered somewhat in afternoon trade, reaching 9103.28 points, but remained lower on the day.

Daniel Roland | AFP | Getty Images
Regarding the fall, Daniel Sugarman, market strategist at ETX Capital, told CNBC: "I think it is a combination of ramped up tensions in Russia and also to do with some pretty disappointing figures out of Germany."

Shares were hit on Wednesday after weak manufacturing data suggested Germany's economy was losing steam. Orders fell 3.2 percent month-on-month in June—the largest decline since September 2011 and worse than expected.

Manufacturing orders from abroad fell 4.1 percent, which the German Economy Ministry linked to sanctions against Russia amid the Ukrainian crisis. It cited "geopolitical developments and risks" as the dominant factor in the "clear reticence in orders".

Market fears over Russia worsened on Wednesday, on reports that the country was amassing battalion groups on the Ukrainian border, potentially to invade the country. Both European and U.S. stock declined.

What could spark a summer sell-off?

Central bank policy
Geopolitical risks
Poor earnings
Another default
VOTEVote to see results
"What we are seeing on our terminals now is some bargain hunters coming and buying the cheap stock," Naeem Aslam, AvaTrade's chief market analyst told CNBC on Wednesday.

"There is no doubt that the markets are in turmoil, however, it is important to remember that it is only times like this when you can buy your favorite stock cheap. When the sale labels are on display, every one start rubbing their hands."
Over the longer term, the DAX has been particularly hard-hit by developments in Russia, as it is dominated by companies that are dependent on Russian energy.

Deutsche Telekom shares also dragged down the index on Wednesday. These traded 3 percent lower in the afternoon, after Sprint retreated from its offer for Deutsche Telekom carrier T-Mobile U.S., as the deal failed to clear regulatory hurdles.

Investors now wonder if the DAX could decline further over the coming weeks to 8913, the low it reached in March.

"It is feasible, but whether it will actually happen is another debate," said Sugarman. "That depends very much on whether the European Union can come to sort of agreement with Russia and also on whether Germany's figures improve. Because this isn't the only bad number we have had out recently from Germany or indeed, the euro zone."

Meanwhile, German 10-year Bund yields fell to 1.096 percent on Wednesday—the lowest level in more than 20 years—before rising slightly to 1.103 percent in the afternoon. Germany's sovereign bonds are viewed as a "safe-haven" asset to rival U.S. Treasurys, and generally gain when investors are risk-averse.

Katy Barnato
Associate Producer,
Greek jobless rate eases slightly
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Greece's jobless rate remained over 27 per cent in May, easing slightly from a month earlier but still indicating that a recovery in the country's jobs market continues to languish despite signs of economic activity.

Figures from the Greek statistics agency, Elstat, showed Thursday that unemployment in May was 27.2 per cent, down from 27.3 per cent in April, after taking into account seasonally adjusted revisions.

Greece is grappling with its sixth year of deep recession which has caused a slump in economic output and sent unemployment to record highs.

Since peaking close to 28 per cent last year, the jobless rate has been declining, albeit very gradually, and the latest figure is still more than twice the eurozone's average rate of 11.6 per cent in May. It remains the highest in Europe, with some 1.3 million Greeks without jobs.

Labor market conditions for the country's younger workers remain extremely difficult, with 53.1 per cent of those aged between 15 to 24 years out of work.

Greece's economy is expected to return to growth in 2014. The Greek government and its international creditors are forecasting an annual expansion rate of 0.6 per cent this year.

Unemployment is expected to ease to an average rate of 26 per cent this year from 27.3 per cent in 2013, according to the latest European Commission forecast.
BoE holds cash rate steady in August
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The Bank of England left its benchmark interest rate on hold on Thursday, but the debate over when to raise it is heating up.

The BOE said its Monetary Policy Committee agreed to leave the central bank's key rate at 0.5 per cent after its two-day policy meeting. Officials also agreed to leave the overall size of its bond portfolio at £375 billion ($US632 billion).

The UK's strengthening economy means the BOE is on course to be the first of the world's major central banks to call time on years of crisis-era monetary policy and lift interest rates from historic lows.

Investors expect officials led by Governor Mark Carney to begin raising their benchmark rate early next year. Some analysts think they could move before the end of 2014. The US Federal Reserve is expected to follow suit in mid-2015.

The UK economy grew by an annualized 3.2 per cent in the second quarter and the International Monetary Fund expects Britain to be the fastest-growing advanced economy this year.

Rapid growth has sent unemployment tumbling, but BOE officials have signaled they are minded to keep rates on hold until there is stronger evidence the economy is nearing full strength and inflationary pressures are mounting. Annual inflation was just below the BOE's 2 per cent target in June, at 1.9 per cent.

In particular, officials are eager to see an improvement in the feeble pace of wage growth, which they fret could mean Britons would struggle to cope with higher borrowing costs. Average weekly earnings, excluding erratic bonus payments, rose a paltry 0.7 per cent in the three months to May, the worst performance on record, according to official data.

Still, there are signs that rate-setters on the nine-member MPC are beginning to form different views over when to tighten policy, which could spill over into outright disagreement. Minutes of the MPC's last two meetings have emphasised that for some officials, the decision whether or not to tighten is becoming "more balanced," suggesting some on the panel are inching closer to voting for a rate rise.

New BOE forecasts for growth and inflation published in the central bank's quarterly Inflation Report August 13 will offer investors fresh clues to the possible timing of the MPC's first move. Mr Carney and his colleagues have emphasized future rate increases will be gradual and limited, and that their benchmark rate is likely to rise no higher than 3 per cent or so for several years.
ECB holds key interest rate steady at 0.15%
AAP AUGUST 07, 2014 10:30PM
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The European Central Bank has held its key interest rates unchanged at its regular policy meeting, two months after easing monetary conditions in the 18-country euro area.

As widely expected, the ECB's decision-making governing council decided to hold the bank's main refi refinancing rate steady at 0.15 per cent, the marginal lending rate at 0.40 per cent and the deposit rate at minus 0.10 per cent.

ECB watchers had not been expecting any new policy moves this month after the central bank unveiled a package of unprecedented measures in June in its battle to prevent the single currency area from slipping into deflation.

At that meeting, the ECB entered uncharted waters, taking one of its key interest rates into negative territory for the first time.

This means that banks will be charged for parking funds at the ECB to encourage them to lend to businesses and consumers instead.

The ECB also unveiled plans to pump more liquidity into the financial system later this year using the Targeted Long-Term Refinancing Operation (TLTRO).

Analysts suggested ECB chief Mario Draghi could talk more about this, as well as the reasoning behind the latest decision, at a news conference later Thursday.
UPDATE 3-ECB warns of Ukraine threat to economy, stands ready to act
Thu Aug 7, 2014 12:39pm EDT
Currencies »
Bonds »
Markets »
Financials »
* ECB's Draghi flags 'heightened' risk for euro zone from Ukraine

* Draghi - ready to buy govt bonds if inflation expectation slip

* Draghi wags finger at Rome and others, says reforms pay off (Adds comments from Draghi, recasts)

By Eva Taylor and John O'Donnell

FRANKFURT, Aug 7 (Reuters) - The European Central Bank signalled on Thursday it stands ready to print money and buy bonds if the euro zone slides towards deflation and warned the conflict in Ukraine poses a serious risk to the bloc's economy.

Speaking after the ECB held borrowing costs at record lows, its president Mario Draghi gave a frank assessment of the difficulties facing the 18 countries that use the euro - not least tit-for-tat sanctions between Russia and the Europe.

"There is no doubt if you look at the world today that the geopolitical risks have increased," he said, highlighting the uncertainty created by the situation in eastern Ukraine, where pro-Russian rebels are battling the Kiev government.

"Some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they ... have on other parts of the world," Draghi said.

Having cut interest rates in June, the euro zone's central bank kept them steady as it waits to see whether September's new round of funding for banks and other schemes will help spur economic activity and avert the threat of falling prices.

Euro zone inflation fell to 0.4 percent in July, its lowest for four years and well below the ECB's near 2 percent target.

Draghi said he expected banks to take up to 850 billion euros of the ultra-cheap four-year loans, which will be tied to lending to smaller companies, the bloc's economic backbone.

Acknowledging that the economic recovery was "weak, fragile and uneven", Draghi also gave an important signal that he would be ready to go further by printing money to buy assets such as government bonds, known as quantitative easing or QE.

He said he would not be discouraged by the fact that the United States was taking a different course, paring back its QE programme as it prepares to raise interest rates next year.

"Monetary policies in Europe and in the United States and the UK are going to stay divergent, are on diverging paths and are going to stay on diverging paths for a long time," he said.

The decision to hold borrowing rates - taken by the ECB's Governing Council - had been expected by economists.

Many are now shifting their attention to next year to see whether the ECB will launch asset purchases.

Draghi explicitly mentioned that option and said it would go further than simply buying asset backed securities (ABS) - rebundled packages of debt - and could include government bonds.

"The QE broad asset-purchase programmes include government bonds, public assets and private assets," he said. "So ABS would be an example of private assets, but then you have QE (buying) government bonds, that is still on the table."

Draghi's comments may help ease frustration among investors and politicians who have long hoped for such a scheme. But some remain impatient.

"We are running out of time," said Roberto Gualtieri, an Italian Social Democrat lawmaker in the European Parliament.

"We cannot afford to wait any longer when other monetary areas are seeing increases in growth and employment and are likely to stop monetary easing. We need action now."


The ECB's rates announcement came shortly after Moscow imposed a ban on imports of many Western foods in retaliation for sanctions over its role in the Ukraine conflict. That includes fruit and vegetables from the European Union, of which Russia is by far the biggest consumer.

NATO warned this week that Moscow had amassed 20,000 troops near the frontier with Ukraine and could be planning a ground invasion under the pretext of launching a humanitarian mission.

Some economists said events could make the ECB act.

"The euro zone is at a crossroads and the economy can go either way," said James Knightley, an economist with ING.

"We are starting to see some signs of stagnation and the geopolitical situation is adding to the risks. Can the weaker euro and better credit conditions offset that? If they don't, that will force the ECB's hand."

Nonetheless, many economists do not expect a reaction from Frankfurt unless there is a dramatic turn for the worse.

"The geopolitical situation is increasing risks to the economy but we don't expect them to change course until next year," Societe Generale economist Anatoli Annenkov said.

The euro zone also faces other hurdles.

Italy, the bloc's third-biggest economy, has slipped back into recession and even Germany, the biggest euro zone economy, is showing signs of stagnation.

Italian Prime Minister Matteo Renzi has led calls to move away from austerity measures and adopt looser EU budget rules, but has been rebuffed by Berlin.

President Francois Hollande of France, the region's No. 2 economy, which is also struggling, has also harried the ECB and Germany to do more to boost growth in Europe.

But Draghi, an Italian, offered an implicit rebuke on Thursday to Italy and France, saying that countries that had made economic reforms were reaping the rewards in higher growth.

"The countries that have undertaken a convincing programme of structural reforms are performing better, much better, than the countries that have not done so," he said. (Additional reporting by Paul Carrel and Maria Sheahan in Frankfurt; Writing by Paul Taylor and John O'Donnell; Editing by Catherine Evans)
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