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Prospects Daily: Portuguese bonds tumble...Eurozone PMIs signal easing downturn…China PMI indicates contraction

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Financial MarketsPortuguese government bonds tumbled on Wednesday, with the benchmark 10-year yield jumping as much as 139 basis points to an eight month high of 8.11% in morning trading, after two ministers resigned from the coalition government, putting at risk the country’s attempts to implement austerity measures to meet the terms of its bailout program. The cost of insuring Portugal’s bonds against default also surged to the highest level in eight months, rising as much as 105 bps to 507 bps.

Developing-country stocks edged lower today, with the benchmark index gearing for the steepest drop in two weeks, amid concerns over China’s economy and surging oil prices. The MSCI Emerging Market Index slid 2.1%, heading for the biggest loss since June 20, as China’s composite PMI fell to the lowest level since September in June. Rising oil, with West Texas Intermediate price surpassing $100 a barrel for the first time in 9 months, loomed to curtail consumer spending and push inflation higher for big energy-importers such as China and India.

Egypt’s bonds fell sharply, pushing the benchmark yield to a record high on Wednesday, as the country’s political crisis deepened after President Mohamed Mursi rejected the military’s July 1 ultimatum to end the turmoil roiling the country by today. The yield on the country’s $1 billion global bond due in April 2020 rose 13 basis points to 10.35% in afternoon trading, the highest level on record.

High-income EconomiesUS labor market data showed signs of improving, with initial jobless claims falling by 5000 to 343,000 in the last week of June. Separately, payrolls data showed that the private sector added 188,000 jobs in June following a downwardly revised increase of 134,000 in May.

The final June Eurozone composite PMI reading – covering manufacturing and services – signaled that downturns in both sectors eased further, with the index rising to 48.7 from 47.7. (A reading of 50 separates contraction from growth).  Manufacturing output fell only slightly, and at the weakest pace during the 16-month sequence of decline. Meanwhile, service sector activity contracted at the slowest rate since January.

Services PMI data for June indicated rising output in Germany for the first time in three months with the index rising to 50.4 from 49.7. France’s services PMI improved strongly to 47.2 from 44.3 in May, marking a 10-month high, although still signaling contraction. Output growth in Ireland was solid, with the services PMI hitting a five-month high of 54.9, while Spain registered the weakest drop in the current two-year sequence of falling activity. Italy was the only nation to report a faster rate of contraction in services.

Developing Economies…East Asia and the Pacific: The HSBC China composite PMI (which covers both manufacturing and services) signaled the first contraction of output in ten months in June, albeit only marginally, falling to 49.8 from 50.9 in May. While manufacturers recorded the first reduction in output since last October, the service PMI showed a modest improvement, rising to 51.3  in June from 51.2.

Latin America and the Caribbean: Brazil’s service sector HSBC PMI posted a reading of 51.0 in June, unchanged from May, indicating a modest expansion in activity.

South Asia: India’s service sector HSBC PMI fell from May’s three-month high of 53.6 to 51.7 in June, indicating a slower pace of activity. Anecdotal evidence suggested that weaker gains in new work and subdued economic conditions were behind the deceleration in output growth.
Middle East and North Africa: Egypt’s headline HSBC PMI index for the non-oil producing private sector fell to 47.5 in June from 48.5 in May reflecting fragile economic conditions and ongoing social and political tumult. The PMI has indicated contraction for nine months in a row.

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