Tension Returns to Debt Market and Hammers European Equities and Main Currency

Tension Returns to Debt Market and Hammers European Equities and Main Currency

The euro ended a strongly bearish week, cutting the gains recorded in the past three weeks against the U.S. dollar on sharp pessimism tension returned to debt market, threatening now larger economies, where the surge in yields has previously led Greece, Portugal and Ireland to seek bailouts and now eyes returned to be focused on Spain and Italy, the largest economies in the euro zone after Germany and France.

With the start of the previous week markets were shocked with the downbeat manufacturing data, which preceded services data that confirmed the contraction in the services sector as well, the thing that led the composite index, which combines the performance of both sector together, to remained contracted, spreading fears that the entire zone is heading towards a deep phase of recession.

Unemployment data came after then to confirm that the euro-area region is slipping into a deep recession, where the jobless rate reached a new all-time record since creating the monetary union, standing now at 10.8%.

Unemployment in the euro zone is led by the Spanish unemployment which reached 23.6% in February, leading the sentiment to deteriorate further as investors are losing faith that Spain might survive this hard period of time, especially after the new austerity adopted are expected to weigh sharply on growth, pushing unemployment higher, spending lower and in result reaching slower economic activity.

Moreover, the Minutes of the FOMC last meeting led markets to trade bearishly against the strengthening U.S. dollar, where policy makers in the U.S. clarified that more easing is not an option unless the U.S. economy shrinks, the thing that reversed the effect of Bernanke's comments and supported the U.S. dollar to recover the losses incurred last week.

During the week, the European Central Bank Governing Council voted to leave rates unchanged at 1.0% as upside pressures on inflation returned and as the bank still attempts to support growth, where Draghi said after the rate decision during the press conference that growth will gradually recover; however, downside pressures remain significant driven by the tension in the debt market.

The Bank of England also tended to maintain the Wait-and-See stance by leaving rates steady at 0.5% and the asset purchases program unchanged at 325 billion pound, where the bank also attempts to control inflation and spur growth at the same time, since the royal economy is affected sharply by the debt crisis in the euro zone and the global slowdown.

In general, volatility are to remain evident in the markets, which likely to remain bearish in the coming week, as investors will be tracking any developments in the debt market as borrowing costs returned to rise, while demand for indebted bonds weakened..