Euro and Deflation

Deflation is typically a feature of severe economic decline and soaring joblessness that far outweighs any benefit to consumers from falling prices. A downward price spiral would make it harder for countries like Greece, Italy and Spain to control government debt, the fund said, because falling prices and wages would further depress tax receipts.

This year, when the central bank, I.M.F. and European Union agreed to another rescue of Greece, the bank would not share in the losses that private investors were required to take on their Greek bonds. That position directly increased the perceived risk of other governments' bonds, by signaling that private investors would be last to collect in case of future losses according to Economist Shayne Heffernan.

Today

10-year Spanish government bond yields extended their recent rises, adding a further 7.3 basis points on the day to 7.03 percent. Five-year yields were up 10 bps at 6.44 percent.

A 10-year bond yield of over 7 percent, as happened with Greek, Portuguese and Irish sovereign debt, is a level many analysts consider to be unsustainable.

Europe's debt markets are not functioning properly due to the slow and complicated decision-making process in the euro zone, Spain's Economy Minister was quoted as saying in an interview with Spanish daily La Vanguardia.

There are no (debt) operations between nations in the monetary union and practically the only demand for Italian debt comes from Italians, Luis de Guindos said.

A similar thing is happening in France and Spain.

The minister added that investors outside the euro zone had no confidence in the euro.

This renationalization of the capital markets is very negative, he said.

In Spain more than half of people under 25 here are out of work. That's Europe's highest rate, ahead of even Greece, which has come close. Spaniards are worried the strain it's exerting on society is putting stability at risk as the government prepares to cut unemployment benefits, among other tough measures aimed at meeting the obligations of a eurozone bailout.

The country's largest labor union, Comisiones Obreras, or CCOO, says 1.73 million people under 30 are unemployed.

However, it says the real situation is worse than the figure shows. Of the 2.4 million under 30 who have jobs, half of them are working on precarious short-term contracts. Another 200,000 are believed to be on unpaid or poorly compensated internships the union criticizes for offering no real training. It says many are schemes for unscrupulous businesses to exploit cheap labor.

In Italy

Premier Mario Monti says he's gravely concerned that Italy's autonomous region of Sicily may soon default.

Italian business groups, unions and politicians have been warning for over a week that Sicily might become the Greece of Italy, thanks to years of financial mismanagement that has recently come to light.

Italian news reports say Sicily's government is €5 billion ($6.14 billion) in the hole and may soon be unable to pay salaries and pensions.

According to a statement from the premier's office, Monti sent a letter Tuesday to Sicily's regional president, Raffaele Lombardo, seeking confirmation that he would resign as promised July 31. He confirmed he would.

The statement was unusual, given Sicily's autonomy from Rome's central government, and reflected Monti's growing concern.

Monti and Lombardo are to meet next week.

In Greece

Greece's crippled economy will fall a steeper-than-expected 6.9 percent this year, a think-tank formerly run by the new finance minister said on Monday, a tumble that will hamper efforts to cut the deficit and bring yet more pain to Greeks.

Such a decline would mean Greece's economy has shrink by a fifth since the end of 2007.

It was underlined by data showing the construction sector still in a deep slump.

The growth forecast, from the Foundation for Economic and Industrial Research (IOBE), could give Athens more ammunition as it tries to persuade euro zone partners and the IMF funding its 130 billion euro rescue package to ease up on the austerity measures it blames for deepening the recession.

The euro fell to a day's low of $1.2263 after the Spanish auction result, having already fallen against the yen and hit record lows against the Australian and New Zealand dollar

The U.S. dollar also weakened, mainly because the Federal Reserve Chairman Ben Bernanke had kept alive talk of more monetary easing in the second stage of his testimony to the U.S. Congress on Wednesday, though he had played down the risks of a double-dip recession.

In oil markets the deadly bombing in Syria and an attack on Israeli tourists in Bulgaria have helped lift Brent crude oil to a seven-week high above $106 a barrel by bringing supply concerns back into focus.

The gains were capped by data from the Energy Information Administration (EIA) on Wednesday showing crude stocks in the United States fell less than expected last week as crude imports rose and refineries scaled back processing rates.

Gold took its cue from the weaker dollar, though investors were less than convinced of its direction, given the uncertainty over Fed stimulus measures and persistent worries about Europe.

Spot gold gained around 0.5 percent to trade around $1,580 an ounce.

Economist Shayne Heffernan of www.livetradingnews.com Market Outlook

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service