Positive U.S. data, particular durable goods orders in August, were able to drive North American markets higher this week. However, news from the euro zone were becoming more dire each day. In fact, Irish and Portuguese 10-year government bonds' yields reached the highest level since their entry into the euro zone, as investors increasingly perceive the investments as very risky.
The situation in Ireland began in the beginning of this month, when it was reported that the Irish government needed to provide further bail-outs to Anglo Irish Bank. Subsequently, rumours persisted that the nation would need EU and IMF aid.
This week, while Ireland was able to sell all $1.5 billion euros of 4 and 8-year government bonds it auctioned, the bonds were forced to be sold at higher yields. In fact, they were sold at 4.767% and 6.023%, significantly higher than April's auction at 3.11% and 5.088%. According to reports, the ECB spent $323 million euros purchasing euro zone government bonds last week, the highest amount in 8 months.
Barclay's believes that most of the money went to buying Irish debt, in order to keep the country's yield lower. However, the effectiveness of that measure is questionable, since Ireland's 10-year bond reached a yield of 6.4% on Thursday, far higher than the 4.5% in April. In addition, Irish 5-year CDS rose to 500 basis points this week.
As for Portugal, the nation's deficit-reducing efforts have not been successful, and economic growth has slowed. In addition, the government is consider to be unstable. Meanwhile, despite assurance by the Greek government that a restructuring of the nation's debt would never happen, investors remain unconvinced, sending the yield spread between Greek and German debt to 9%.
The picture only looked more grim as the week went on. On Thursday, Ireland's 2nd quarter GDP surprisingly fell 1.2%, after it had risen 2.2% in the 1st quarter. The news dramatically raised concerns that the former Celtic Tiger could enter a double-dip recession.
In addition, euro zone PMI in August fell to 53.8, which was lower than the 55.7 that was expected. In addition, it was the weakest reading since February, and the largest fall since November 2008. Research company Markit stated that the growth of Europe's engine, Germany, was rapidly decelerating. It also warned that double-dip recession risk in the euro zone is rising.
As if more evidence was needed, Reuters stated that the market expects euro zone growth every quarter before the end of 2011 to be between 0.2% and 0.4%. That is barely above 0%, meaning a slightly slower-than-expected growth rate for just 2 quarters would officially send the euro zone into a double-dip recession. One bright spot last week was Friday, with an unexpected rise in the German Ifo business climate index.