Important developments today:
1. Bond default risk increases in Europe
2. Euro Zone activity climbs in March
3. Factor orders in Germany remain stable in February
Bond default risk increases in Europe. The cost of insuring European corporate bonds against default climbed on Wednesday, amid speculation that a sovereign default by Greece may become inevitable over time. Spreads on the Markit itraxx Crossover Index of 50 companies with high-risk investment credit ratings—a benchmark for the cost of insuring corporate debt against default—widened by 2 basis points (bps) to 419bps today, according to JP Morgan Chase. Contracts on the Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 0.5bps to 77.25bps; while the Markit iTraxx Financial Index of 25 European banks and insurers increased 0.5bps to 91bps.
Meanwhile, Greece led the increase in sovereign debt risk, with 5-year credit-default swap spreads (or CDSs, a key gauge of sovereign risk) surging 47bps to 393bps, the highest level since February 25. CDSs for Portugal increased 8bps to 153.5bps; Spain widened 9.5bps, and Italy climbed 6.5bps to 122.5 bps, according to CMA-Datavision. An upcoming official visit to Greece by International Monetary Fund staff should provide some help to market sentiment over coming weeks. Greek officials earlier denied pushing to revise a potential bailout plan hammered out last month to exclude the IMF.
Euro Zone activity climbs in March. Private sector business activity registered the largest increase in March since August 2007, according to the latest report from Market Economics. The Purchasing Managers’ Index (PMI) for the service sector increased sharply to 54.1 in March from 51.8 a month earlier, revised up from a flash estimate of 53.7 two weeks ago.
The service sector in Spain grew for the first time since the onset of the financial crisis. Combined with data released last week on the manufacturing sector, which was revised up to a reading of 56.6, the composite PMI for the Euro Zone for March was moved up to 55.9, well above February’s reading of 53.7. The data indicates that despite setbacks from unemployment and weather conditions, the Euro Zone is likely to demonstrate positive GDP growth in the first quarter.
German factory orders stable in February. Total orders at factory gates in Germany were unchanged in February following a 5% surge in January (m/m) as an increase in export orders compensated for a slowdown in domestic ones. As domestic orders declined by 1.9% in February (m/m) due to wintry conditions, external demand picked up by 1.8%, leaving the total manufacturing orders index unchanged. The momentum in factory orders (3 month rolling average, saar) has come off peak recovery growth rates of 44% from the second half of 2009, but remains on positive ground at near 10% (saar).
Among emerging markets:
In South Asia, India’s service industries expanded for an eleventh month in March, as indicated by the HSBC-Holdings/Markit Economics PMI, which stood at a level of 58.1 compared to 60.9 in February. Strong demand for banking and hotel services are adding to price pressures. According to Finance Minister Pranab Mukherjee, India’s economy could expand as much as 8.75% in the year ending March 2011. Sri Lanka’s government is targeting a halving of the budget deficit to 5% of GDP in three years from 9.7% in 2009, and an expected 7.5% in 2010, as stronger economic growth in the aftermath of the civil war is boosting revenues.
In Sub-Saharan Africa, Namibia’s diamond output is expected to surge 18.8% this year, driving growth in the mining sector to 7.8% according to the central bank’s annual report.