Spanish Borrowing Costs Jump

Compare and contrast: the interest rate on the three month
note issues by the Spanish yesterday was 5.11%, the interest rate on the US equivalent
was 0.01%. Spanish borrowing costs jumped from last months auction partly
because we are in-between governments and the incoming party is still unsure if
it will be able to pass the necessary austerity measures to (hopefully)
reassure the markets but also because Euro-zone sovereign debt markets are now
completely dysfunctional.  The Euro, after a bit of a rebound yesterday,
has opened today on the back foot because of the Spanish problems yesterday and
also due to a story overnight about the potential renegotiation of the bail-out
of Dexia Bank.  Chinese PMI was also lower than consensus estimates and
risk sentiment, which has been falling over the past week, will be further
reduced and that means USD strength, Euro and GBP weakness and stock markets
continuing to fall.

The Federal Reserve minutes from last months meeting were
released last night, and in light of the US GDP revision downward yesterday
afternoon were surprisingly neutral in tone. Only one member, Chicago president Charles Evans, voted in
favour of QE3
with several unnamed members suggesting further action may be warranted. The
mere fact that further easing was not ruled out was enough to produce a bounce
in US equity markets before normal service was resumed in the asian session.

The Bank of England will follow their Central Bank
compatriots in the US
by releasing their own minutes from this months meeting. Again the market will
be looking for signs of further monetary stimulus early next month. Usually
tight fiscal and loose monetary policy translates into a weak currency, but Sterling has remained
fairly steady over the last year. The size of any further QE will  be an
important factor in whether Sterling
stays within or breaks out of it recent range.

Report by Alistair Cotton