Bond market suffers as Portugal downgraded

EU members scrambled yesterday (7 July 2011) to avoid the debt crisis in Greece from destabilising the currency union, threatening credit-rating agencies with possible retaliation following the decision by Moody’s to lower Portugal’s debt to junk status.

With the downgrade came a warning that Portugal, like Greece, may require a second bailout pushing European equities lower yesterday and bond spreads higher. The interest on Portuguese debt rose 220 basis points to 16.7% with equivalent Spanish and Irish debt rising 130 and 250 basis points respectively. This was met with signs of growing frustration among EU officials, in particular Jose Manuel Barroso as he accused ratings agencies of being anti-European. "It seems strange that there is not a single rating agency coming from Europe," he said. "It shows there may be some bias in the markets when it comes to the evaluation of specific issues in Europe." The news has placed increased pressure on the euro, now sitting at 1.4296 against the dollar and approaching 1.12 against the pound.

So far today we had UK May industrial production +0.9% m/m at 9.30am slightly weaker than median forecast of +1.1% yet still the highest reading since March 2010.In addition we had manufacturing data production +1.8% m/m, stronger than median forecast of +1.0%, also highest since March 2010. Later on we have interest rates in UK which are expected to remain at 0.5% and European rates which are expected to rise to 1.5%. As ever, all eyes will be on the ECB press conference where Mr Trichet will discuss the European outlook and traders will listen carefully into the vocabulary used to gauge future ECB decisions.

As for the rest of the week we have the NIESR GDP estimate tomorrow morning in the UK. Now this is a highly respected number that comes out a month before the official release and they are predicting a 0.4% figure for the quarter. Following this we have the job numbers in Canada and the US with the latter expected to maintain unemployment at 9.1% and the number of payrolls to increase by 100k.