EUROPE AND ITS DEBT CRISIS REMAIN IN FOCUS - Despite Federal Reserve updates overnight and a Bank of England monetary policy meeting later today - Europe and debt are still in focus today. Portugal got away with a successful bond auction yesterday, and today sees the turn of Spain. It is also anticipated that next week's Eurogroup meeting will see a review of the rescue fund and of the interest rate being charged on the Irish bail-out funds. Yesterday Ireland drew down the first tranche of money under its bail-out agreement.
Justin Urquhart-Stewart, of Seven Investment Managers in London, says the growth figures from Ireland look very good with a big surge in industrial growth. He says that at the moment Ireland 'is showing a clean pair of heels' to the rest of the euro zone countries. Ahead of today's Spanish bond auction, he predicts that it will be successful but adds that problems remain within the euro system. He says that running a single currency needs discipline. He would like to see greater levels of co-ordination and also greater levels of flexibility.
The analyst says that the Bank of England will 'not dare' raise UK interest rates at its meeting later today as it remains very concerned about inflation and how any rate rise would hit consumer power.
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MORNING BRIEFS - Tesco says severe winter weather hindered its Christmas trading performance as it posted modest 0.6% like-for-like sales growth. The supermarket firm is the world's number three retailer. It has over 5,000 stores in 14 countries, and it says heavy snowfall and freezing temperatures particularly hit its non-food offering as customers were unable to travel to their larger stores. Terry Leahy, Tesco's chief executive, said this morning that its performance remains solid but was hindered in the run up to the important Christmas trading period in the UK by the disruptive effects of the severe winter weather conditions.
*** Overnight the US Federal Reserve said the US economy expanded 'moderately' in recent months, but it warned a poor housing market continues to drag on the recovery. As it gears up for a key policy meeting later this month, the Fed Beige Book survey showed that the manufacturing sector continued to lead the economic recovery in most of the Fed's 12 districts, while the retail sector picked up steam over the Thanksgiving and Christmas holidays.
*** Yesterday Jose Manuel Barroso, president of the European Commission, said he supported the new wider role for the rescue fund and predicted it would be endorsed by finance ministers at the eurogroup summit on Monday. This would mark a big change in the EU's way of tackling the debt crisis since the €440 billion rescue fund, the European Financial Stability Facility, was created during Greece's rescue last year. Germany had been reluctant to support any new EU powers to combat market panic, but this latest statement suggests a new willingness to to unite behind a revised strategy.
*** Spain is likely to pay a premium of a little less than 5% when sells up to €3 billion of five-year bonds this morning. It is Spain's first time to face the debt markets this year, but a successful issue from Portugal yesterday has eased tensions. After Portugal's sale the premium demanded by investors to buy Spanish rather than benchmark German debt retreated from near six-week highs reached on Monday to around 244 basis points yesterday, the lowest level in over a week. Traders cited talk of an expansion of the EU rescue fund as supportive for peripheral bonds.
*** On the currency markets this morning the euro is trading at $1.3093 and 83.15 pence sterling.
