May 24, 2012 / 3:33 AM / 6 years ago

Darker economic outlook sends euro lower

LONDON (Reuters) - The euro hit a 22-month low and safe-haven German bonds achieved record low yields, after data showed Europe’s economic woes worsening as business confidence is undercut by talk of a Greek exit and slow progress in tackling the debt crisis.

A woman smiles as she walks past an electronic board displaying graphs showing recent movements of Japanese market indices, outside a brokerage in Tokyo February 15, 2012. REUTERS/Yuriko Nakao

Private-sector factory activity in China also faltered in May as demand for exports fell, in a sign the impact of the euro zone crisis could be undermining global economic recovery. Europe is China’s largest export market.

The darkening economic outlook spurred the dollar on Thursday to a 20-month high against other major currencies, but shares staged a modest rebound after a late-day reversal in the United States encouraged some bargain hunters.

The key reading from the latest round of Markit Purchasing Managers Indexes (PMIs) was a fall in Germany’s factory sector, which was hit by a drop both in exports and new orders for goods.

In addition, German business sentiment dropped for the first time in seven months, missing even the most conservative forecasts, according to the Munich-based Ifo think tank.

“Companies are now reacting to the increased uncertainty out there. And that’s not going to abate,” Andreas Scheuerle, an economist at DekaBank.

The PMI data for the euro area showed activity was declining at a faster pace than expected in May, which was seen as confirmation that a downturn started in smaller periphery members is taking root in the core countries of Germany and France, whose tepid growth had been keeping the troubled bloc afloat.

“It’s a message to EU policymakers that the situation is not as good as they describe it,” Lloyds Bank strategist Achilleas Georgolopoulos said.

The euro dropped sharply after the data to $1.2515, its lowest level since July 2010.


The data added to a widespread nervousness about the impact if Greece leaves the euro zone on the region’s fragile banking system, and growing signs of a lack of cohesion among EU leaders on how to tackle the debt crisis.

A summit of European Union leaders, who have been advised by senior officials to prepare contingency plans in case Greece decides to quit the single currency, was unable to shed new light on what euro zone nations plan to do.

As a result, 10-year German government bond yields fell to a record low of 1.35 percent and 30-year bond yields were 8.8 basis points lower at 1.91 percent - a new all-time low.

The yield on 10-year UK government Gilts was down 2 basis points at 1.749 percent, having fallen to a record low of 1.74 percent.

The UK reported its own recession was deeper than originally thought with the economy contracting by 0.3 percent in the first quarter of this year, causing the first annual decline in output since the final quarter of 2009.

Britain is in its second recession since the 2007-2008 financial crisis and pressure is building on the central bank to consider more quantitative easing (QE).

“The downward revision to UK Q1 GDP... the downward trend in UK CPI inflation, worrying German survey data and strengthening headwinds from the euro zone all suggest the case for more QE from the BoE (Bank of England) is mounting,” Jane Foley, senior currency strategist at Rabobank, said.

European shares, which recorded one of their worst days of the year on Wednesday, staged a modest recovery despite the signs that factory activity was deteriorating in major economies but sentiment was fragile.

The FTSEurofirst 300 index .FTEU3 of top European shares was up 1 percent at 982.13 after slipping 2.2 percent in choppy trade on Wednesday.

MSCI’s world equity index .MIWD00000PUS added 0.3 percent, lifted by slight gains in emerging markets .MSCIEF recovering from 2012 lows posted in the previous session.

Oil markets were taking their cue from the weaker Chinese PMI data.

HSBC’s Flash Purchasing Managers Index, the earliest indicator of China’s industrial sector, retreated to 48.7 in May from 49.3 in April, marking the seventh straight month that the index has been below 50, indicating contracting economic activity.

Easing fears on oil supplies, as talks between Iran and the West on Tehran’s disputed nuclear program progressed, also kept gains in check. Brent crude oil slipped 11 cents to $105.45 a barrel, while U.S. crude CLc1 rose 23 cents to $90.13.

Editing by David Holmes

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