Euroland and gilts

Very much consistent with the tide of news and commentary coming out of Euroland, Spiegel has reported the European Commission wants to give countries like France and Spain more time to reduce their debts, but the German government wants them to speed up. Spiegel say that they have seen a report written by Chancellery staff that identifies that reforms are lagging and lists the shortcomings of Southern European countries.

Separately, according to Spiegel, the ECB would like to encourage banks in Southern Europe to issue more loans, but Berlin is concerned that a planned move to trigger such lending could violate EU treaties and as a result German Finance Minister Wolfgang Schäuble has hit the brakes.

We can get a vignette of the ongoing tensions with the announcement that the Eurogroup approved on Monday, release of Greece’s two next bailout instalments totalling €7.5bn. But actually if we look at the details, we can see that Euroland finance ministers agreed that Greece should receive €4.2bn later this week after the Euro Working Group and the directors of the European Financial Stability Facility (EFSF) meet, but the second sub-tranche of €3.3bn will be disbursed only after Greece has met the “milestones” agreed with the troika – these being certain structural reforms.

As a window on developments in Euroland we are due today the industrial production (IP) numbers, which should advance by 0.6%mom in March, notably thanks to the strong German reading. The reading will be another set of data that will feed into Q1 GDP which we believe will increase by 0.1% qoq (due to be released tomorrow).

Meanwhile, despite the ECB’s well-anticipated rate cut and tentative dovish opening to negative interest rates, the euro has continued to benefit from reduced credit risk premium and reserve diversification flows. A positive growth surprise is likely to provide further support to the euro following the long series of negative data surprises in Euroland. And a stronger euro will undermine the drive for global competitiveness that Euroland desperately need to underpin a pick up in growth. No wonder conditions remain tricky both economically and politically.

With Europe in focus, Prime Minister David Cameron has offered to support a bill authorizing a referendum by 2017 on the UK’s continued membership in the European Union and he will have received some comfort on his economic agenda and related future electoral popularity from the RICS house price balance which rose to +1 from -2 in March, this being the first reading above zero since June 2010, whilst a measure of inquiries from new buyers rose to 25 from 13, the highest since November 2009.

Gilt issuance resumes in the UK today with £4.8bn of 5 year supply. Other than Thursday’s auction of 30 year bonds, this is the last Gilt supply in May. The next auction will be 30 year index linkers on 4th June, followed by coupon payments on 7th June – and that leaves overall negative net issuance that week. This supply pattern should be supportive for gilts – but beware false rallies. Real yields remain negative and look set to stay that way and in the medium term yields will likely rise – and prices fall.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla