Debt turmoil weighs on market sentiment

illustration: graph

(29.07.2011) The debt problems, both in the US and in the euro area weighs on market sentiment and investors looks for safe havens. As a result US equity markets has fallen, government bond yields have declined and the Swiss franc has strengthened over the past 24 hours.

By Camilla Viland, Analyst at DNB Markets

Markets are clearly nervous and investors seek safe havens. As a result US equity markets have fallen and government bond yields have declined over the past 24 hours. In the currency market safe havens like the JPY and CHF have strengthened. The latter yesterday reached a new all time high versus the dollar at 0.7987.

The main reason for the nervousness seen in the markets is the debt problems both the US and the euro area are facing. The market fears that the US politicians will not be able to agree on how to raise the US debt ceiling. According the US Treasury the ceiling must be raised by August 2nd for the government to be able to meet all its obligations. If a solution is not reached, markets fear that the US sovereign credit rating will be downgraded or even worse, that the US will default on some of its debt.

The latest news now is that the Republicans have delayed voting on a plan to raise the nation's borrowing authority as some forces in the party calls for even more spending cuts. The Republicans will meet again today to discuss their next steps. Even if the Republicans agree on a new plan and has it passed through the House of Representatives, such a plan is not likely to be approved by the Senate where the Democrats holds majority.
 
Furthermore the worries regarding the debt problems in the euro area does not seem to be over, even after a new rescue deal for Greece was reached last week. The market fears that the measures will not be enough to prevent contagion to other larger countries, like Spain and Italy. This got renewed attention yesterday after Italy sold 10 year bonds, but only at the cost of soaring interest rates. The yield on an Italian 10 year bond yesterday reached the highest level in 11 years.

Furthermore there were yesterday rumors that the Italian finance minister, Tremonti, had resigned. These rumors were later denied; still they caused uncertainty in the market. These events contributed to a sharp weakening of the euro during yesterday. The European currency did however recoup some of the losses over the evening and night as attention again turned to the above mentioned US debt ceiling conflict.
 
There were few important key figures on the agenda yesterday. Today's agenda may be more interesting. From the US preliminary GDP figures for Q2 are released. In Q1 GDP grew by 1.9 per cent q/q yearly rate. It was in particular private consumption and inventories that pulled growth up. Consumption is also expected to have contributed positively to growth in Q2, but not as much as in Q1. Positive contributions from net exports are also expected. In total, consensus expects GDP to have grown by 1.8 per cent in the second quarter.

The most important figure released for the euro area today is the preliminary inflation figures for July. The yearly inflation rate is expected to hold steady at 2.7 per cent. Inflation is one of the ECB's major concerns and the main reason why the interest rate has been hiked twice since April. The central bank has signaled that more hikes may follow. An outcome above expectations may raise the probability of further hikes.
 
The highlight on the Norwegian agenda today is the unemployment figures released from NAV. Last month registered unemployment decreased by 100 persons (seasonally adjusted) in June. The decline was less than in the previous months. Gross unemployment (incl. persons on labour market measures) increased by roughly 900, due to more people on labour market training than usual. The unadjusted unemployment was unchanged at 2.5 per cent, in line with expectations. The June data confirmed that the labour market still is improving, but that there are signs of stabilizing. For the data going to be released today, consensus expects gross unemployment to go down by 500 persons (seasonally adjusted figures) and the unemployment rate to go up, from 2.5 to 2.8 per cent. (unadjusted)