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Prospects Daily: European equities rally, while Greek bond yields climb above 100%

Global Macroeconomics Team's picture

Important developments today:

1. European equities rally, while Greek bond yields climb above 100%

2. ECB cuts policy rate by 25 basis points

European equities rally, while Greek bond yields climb above 100%. European stocks markets advanced strongly, paring earlier losses, amid growing speculation that Greece may abandon a referendum on the latest European Union’s bailout plan. It has been reported that Greek Prime Minister George Papandreou will step down today and the country’s new government will accept the EU’s rescue package to prevent a disorderly sovereign default. Markets were also boosted by the surprise decision by the ECB to lower its benchmark interest rates. The benchmark Stoxx Europe 600 Index advanced 1.6% in mid-day trading, after earlier sliding as much as 1.5%. Meanwhile, Greek two-year yields climbed 10.58 basis points to a record high of 107.16% today.

ECB cuts policy rate by 25 basis points. In a move that surprised the markets today, the ECB cut its main policy rate by 25 basis points (from 1.5% to 1.25%). At a three-year high of 3%, inflation remains above the 2% target. However, with the current turmoil in the Euro Zone spilling over to the real sector and with expectations that price pressures are going to fall sharply in 2012, the ECB’s move could provide some much needed support to the real economy. Manufacturing activity in the Euro Zone, the sector that has driven much of the post-crisis recovery so far, is currently in a contractionary phase. According to the latest Purchasing Manager’s Index, hitherto stronger performing economies in the zone, including Germany, France, Austria and the Netherlands are all experiencing a contraction in their manufacturing sectors. Given these developments it was not surprising that, the new ECB chair Mario Draghi, who succeeded Jean-Claude Trichet on Tuesday, noted in his maiden news conference that there was a risk of a mild recession in the Euro Zone.

Among Emerging Markets

In Sub-Saharan Africa, Uganda’s central bank raised the key lending rate for the fourth consecutive time from 20% to 23% in a bid to control runaway inflation. Annual inflation reached a 20-year peak of 10.5% in October, provoking discontent among the domestic public. 

South Africa’s unemployment rate eased marginally from 25.7% in the second quarter to 25% in the third quarter, translating to about 4.45 million unemployed persons. While employment increased by 1.5%, labor market entrenchment remains a considerable challenge to the economy.

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