European Crisis: Global Rate Rally Fades as Recession Concerns Grow

• Shock rate cut from People's Bank of China lifts stocks
• Bank of England adds £50bn additional firepower to asset purchase programme
• ECB cuts key lending rate to record low 0.75 percent, slashes deposit rate to zero
• Denmark's Central Bank drops lending rate to 0.2 percent, slaps negative rate on deposits
• Spain raises €3bn in bond sale; Ireland tests market for first time in 2 years

1545 BST: Weaker into the close

Steep 3 percent plus declines for Spain and Italy and overall equity market weakness after today's (not?) co-ordianted rate cuts from China and Europe and a gloomy assessment of the obvious from ECB President Mario Draghi.

RIP the policy rally.

1535 BST: The Liberal view

RBS analysts hit the same note as my colleague, Lianna Brinded, has earlier today with her report in the China rate cut:

We see the PBOC's move to cut rates rather than RRR as a liberalisation and not quite a policy easing to alleviate current tight liquidity condition. While it would drive down the entire interest rate term structure, it might not generate loan growth expansion as banks are not getting any new money. Yet, market participants must now price in more rate cuts as this is the second cut in less than two months

1515 BST: US market weakens

The short-lived optimism from the better-than-expected ADP jobs report has faded with a grim reading of the services portion of the US economy last month (as measured by the Institute of Supply Management's non-manufacturing index) of 52.1. That's a huge gap from May's 53.7 reading and well below the Street consensus of 53.0

US 30-year Treasury bonds quickly gained a full point after the figures were released, taking the yield to 2.7 percent. German bund futures continue to really, reaching a session high 143.12.

1510 BST: Libor scandal

Bank of England Deputy Governor Paul Tucker will appear before the UK's Treasury Select Committee Monday while Barclays (and British Bankers' Association Chairman) Marcus Agius will appear Tuesday. Both will answer questions regarding the now-beyond-control scandal surrounding allegations of Libor manipulation that could have far-reaching effects on banks not only in the UK but in Europe, the US and all around the world.

1505 BST: Third rate cut of the day

This time from the Danish Central Bank, which lowers its key lending rate to 0.2 percent from 0.45 percent and put a *negative* rate of -0.20 percent onto deposits at the Bank.

It says, directly, that the ECB rate decision was the impetus for the move, but it's entirely sensible: around €800bn is going to leave the ECB over the next few days and if it finds its way into European currencies other than the euro, that's going to have a big impact on exports and other balances in the respective economies (Denmark, Sweden, Switzerland, Norway, etc.). The rate cut effectively neutralizes this concern by making the Danish crown slightly less attractive (on an interest carry basis) than it was just a few moments ago.

1500 BST: Spanish weakness

Spain's IBEX is leading the major index decliners around Europe this afternoon with a 3 percent fall while its benchmark bond yields have risen to 6.67 percent after the poor €3bn, three-part bond auction earlier this morning. We've also seen several stocks on Italy's FTSE MIB halted as the index gives back nearly 2.5 percent of its recent gains and its 10-year bond yields rise to 5.8 percent.

1415 BST: Draghi on Libor Scandal

... says "a lot of action" should be taken to improve governance of Libor process.

1400 BST: It was a fun theory while it lasted

... But ECB President Mario Draghi says there was no unusual co-ordination between his bank and his opposite numbers in the UK and China

1355 BST: ECB text

Based on our regular economic and monetary analyses, we decided to cut the key ECB interest rates by 25 basis points. Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialised. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.

Let me now explain our assessment in greater detail, starting with the economic analysis. On a quarterly basis, euro area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3% in the previous quarter. Indicators for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty. Looking beyond the short term we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum.

The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to a renewed increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Downside risks also relate to possibly renewed increases in energy prices over the medium term. Euro area annual HICP inflation was 2.4% in June 2012, according to Eurostat's flash estimate, unchanged from the previous month. On the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be again below 2% in 2013. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.

1340 BST: ECB press conference

ECB President Mario Draghi kicks of this month's presser with the usual "state of the (monetary) union" comments regarding growth (risks to the downside) and inflation (ditto). Says HICP should dip below 2 percent next year and that the biggest upside risks for "price stability" are higher taxes and commodity prices.

1335 BST: Barclays on the ECB rate cuts

In our view, by cutting the deposit rate to zero, the Governing Council is sending a strong signal that it is sufficiently concerned by weak bank lending to the private sector (as apparent in last Friday's MFI data) that it is prepared to take this very unusual step, and therefore to overcome concerns on how such a move might affect the functioning of the money market. Meanwhile, the reduction in the refi rate will help banks in Southern Europe, since they are heavy borrowers from the Eurosystem (amounting to nearly EUR600bn). As we commented also earlier today, on the euro area bank interest rate data, ECB President Draghi appears to have a particular level of concern about the economic impact of high interest rates and tight credit conditions prevailing in Southern Europe.

1330 BST: US job market improvement

Hot on the heels of a better-than-expected reading of private employment from ADP we're getting a better sense of job market improvement through weekly US jobless claims from the Labor Department, which fell to 374,000 from 388,000 last week. The keenly-watched four-week moving average is also lower at 386,750.

1325 BST: Euro weakness

The strong ADP payroll reading might be reversing a few bets in the foreign exchange market for a third round of quantitative easing from the US Federal Reserve (normally considered a "currency negative"). That, coupled with the ECB decision on rates (both lending and deposit) are pushing the Euro to a one-month low $1.2407 against the resurgent greenback.

1315 BST: Roller coaster

A private report on US employment showed payrolls increased by 176,000 last month, well ahead of the Street consensus for a 105,000 gain. The numbers suggest a bigger-than-expected increase will be announced by the US Labor Department Friday when it unveils its monthly employment report.

US stocks futures are now back into positive territory after the figures, having turned red in the wake of the triple-rate cuts from the PBOC, ECB and the BoE.

1300 BST: Deposit rate fallout

If the ECB's intention in cutting the rate it pays on deposits to zero was to entice more capital into the Eurozone economy, the immediate signs aren't good. Investors are slamming the single currency against European partners: it's trading at an 11.5 year low against the Swedish crown (8.635) and is down to the lows of the day ($1.2480).

If the Swiss franc moves sharply from its 1.20 "soft peg" against the Euro as investors flee the region, watch for decisive action from the Swiss National Bank later today.

The global rate cuts (co-ordinated or not) are hurting US stock futures, as well, as investors see the "half-empty" side of the moves as opposed to the more optimistic opposite.

1245 BST: ECB rate decision

The European Central Bank has cut its key lending rate to 0.75 percent from 1 percent and it's key deposit rate to 0 percent from 0.25 percent.

1230 BST: Co-ordinated cuts?

Central banks around the world famously moved in unison on 8 October 2008 in the immediate wake of the Lehman Brothers collapse and the global market panic it had created. Today's surprise cut from the PBOC has set conversations around the market alive with speculation that the European Central Bank will move more aggressively on its key lending rate of 1 percent than first anticipated. We'll find out in 15 minutes!

1215 BST: Global rate moves

For the second time, China's policy makers have usurped Europe's rate-setters with a cut in key rates on the same day as key decisions from the BoE and the ECB. The move suggests a deepening concern around the world for the state of the global economy.

This is China's second rate cut in as many months after holding them steady for more than three years. The People's Bank of China has also lowered reserve requirements for the country's banks three times since late last year in order to free-up lending. China's economy is expected to grow by around 8.3 percent this year, according to the IMF. Official second quarter figures are due to be published on 13 July.

1205 BST: China Rate bombshell

China has dramatically cut is key lending rate by 31 basis points to 6 percent and its key deposit rate by 25 basis points to 3 percent.

Stocks in Europe are rising quickly as a result of the move while German bund futures tumble to down 5 ticks on the session (142.27).

Gold and copper prices hit session highs in immediate wake of rate surprise: gold now at $1,622.70

1200 BST: BoE rate decision

No change in rates but an addition of £50bn to the asset purchase programme. Gilt futures dip marginally down 10 ticks, FTSE Eurofirst gains 0.4 percent.

1135 BST: Spanish weakness

Spain's 10-year bond yields have been rising since this mornings €3bn auction with the benchmark trading at 6.6 percent (a 20 basis point increase) and credit default swap prices now clearly more expensive than for Ireland (531 basis points versus 518 basis points).

1125 BST: S&P Moves on Barclays

Standard & Poor's Ratings Services revised its outlook on Barclays Bank PLC (Barclays) to negative from stable. At the same time, we affirmed our 'A+/A-1' long- and short-term counterparty credit ratings on Barclays. We also affirmed our 'A+/A-1' ratings on "core" subsidiaries Barclays Private Clients International Ltd. and Barclays Capital Inc. and revised the outlook on both entities to negative from stable.

The ratings on Barclays Bank Ireland PLC (A-/Negative/A-2) and Barclays Bank S.A. BARCBY.UL (BBB+/Negative/A-2) are unaffected by this rating action because the outlook on the long-term ratings on both entities is already negative.

1105 BST: Germany factory orders

May Factory orders up 0.6 precent net (with a big -1.3 percent dip domestically). Capital goods orders up 0.2 percent. Domestic consumer goods orders down -2.2 percent but offset but a solid +8.6 percent increase from foreign buyers.

Germany's Economy Ministry says conditions remain good for the moment, despite the growing uncertainty in Europe.

1040 BST: Irish return

Ireland wraps up its first public debt auction in more than two years with a €500m sale of three-month treasury bills at an average yield of 1.8 percent. Total bids were €1.4bn, according to the National Treasury Management Agency. Ireland's borrowing costs at the three-month level are now lower than Spain's, based on today's sale.

1025 BST: Fitch on the Libor scandal ...

... with some sensible (finally!) views and perspective:

Political, regulatory and reputation risks for Barclays BARC.L and other major global banks involved in setting Libor have increased due to the resignation of senior figures, settlements with regulators and the on-going investigation into Libor practices, Fitch Ratings says.

The long-term business, financial and credit risk implications are unclear. However, for Barclays, the direct implications, in terms of the size of the regulatory settlements announced last week, are easily manageable given its capital and earnings capacity.

The resignations or intended resignation of Barclays' Chairman, CEO and COO, and the possibility that others may follow, create headline risk and the potential for temporary management dissonance. But Barclays is a large firm with many experienced managers capable of running its various businesses day-to-day.

1020 BST: France bond sale

France adds another €7.8bn to its 90 percent debt-to-GDP pile with this morning's sale of 7-year, 10-year and 11-year debt.

The benchmark 3 percent 10-year sale raised €4.671bn and priced to yield 2.53 percent. Total bids amounted to €9.1bn for the 10-year sale.

0945 BST: Spanish bond auction

Spain sells just shy of €3bn in three bond sales: 2015, 2016 and 2022 maturities. The benchmark 10-year raised around €747m with a bit to cover of 3.2 (meaning €3.2 was bid for each €1bn on offer) and an average yield of 6.43 percent. That's an increase of 40 basis points from the 7 June sale - which was, of course, before the EU and Spain agreed to a potentialy maximum €100bn bailout for Spain's banking system.

0935 BST: Bond yields creeping higher

Spain's benchmark 10-year bond yields have risen past 6.5 percent today ahead of its €2.5bn auction later this morning. Italian 10-year debt is also modestly weaker at 5.82 percent. Benchmark 10-year bunds are marked at 1.45 percent while similarly-dated Gilts are trading a price that yields around 1.69 percent.

0915 BST: Meanwhile in Athens

... Newly sworn Finance Minister Yannis Stournaras will meet senior officials from the Troika (ECB, EU, IMF) of lenders administering Greece's €240bn bailout terms. The Catch-22 Greece now faces is extreme - and largely ignored now by a market more focused on Spain and Frankfurt.

Greece needs the next Troika tranche of funding - €31.5bn - to survive. It's likely to run out of cash by late July and, if it's not able to satisfy lenders that it's got a reasonable plan in place to address its myriad structural and fiscal issues, it won't get the money. However, part of the coalition's electoral mandate was built upon a promise - however vague - to renegotiate terms of the bailout and the austerity measures it entails, specifically with respect to government-sector job losses and tax hikes.

Stournaras and his Prime Minister, Antonis Samaras, will find their options are increasingly bleak: appease the Troika and perhaps watch their government collapse or resist the Troika and resort to paying public servants with IOUs instead of Euros.

0835 BST: Why not wait?

RBS analysts Richard Barwell and Gareth Anderson argue a persuasive point in their morning research note regarding today's expected move from the Bank of England to jump-start its £325bn programme of quantitative easing with another £50bn in asset purchases.

Given the fact that the BoE has recently activated its emergency lending facility - kicking out £5bn in 6 month loans against assets that are of little use to anyone else - and that it fully supports the government's new "funding for lending" scheme, which Governor Mervyn King said will have a "significant" impact on providing "real incentives for banks to think carefully about the benefits to them of expanding lending to the UK real economy", then why the need for another £50bn now?

Does the Bank truly believe its rhetoric with respect to the ECTR and the "funding for lending" programme? If so, then what's the harm in waiting until the fall to see if it delivers real improvements? If not, then why trumpet the programmes in the first place?

Many will seize up the logic of the latter by suggesting the Bank has lost its independence from the government (and certainly Chancellor Osborne's move yesterday to focus on the role of the previous Labour government, rather thanPaul Tucker and the BoE) in the ever-developing Libor scandal suggests an uncomfortably close relationship.

The more innocent - but perhaps more damaging - explanation is that King and the rest of the Bank's Monetary Policy Committee are seeing a kind of prolonged weakness in the UK economy that is going to need to be fought on several monetary fronts. Whether King is actually close enough to Osborne to convince him to move on the fiscal side of things remains to be seen.

0810 BST: Moody's on Barclays

Moody's Investors Service has lowered the outlook on Barclays' "standalone" rating to negative (from stable) in the wake of the departure of both CEO Bob Diamond and the impending exit of Chairman Marcus Agius. Shares are up marginally this morning despite the Moody's view.

Moody's decision to change the outlook on Barclays's C-/ baa2 standalone rating to negative from stable reflects the rating agency's concerns that the senior resignations at the bank and the consequent uncertainty surrounding the firm's direction are negative for bondholders.

Specifically, the shareholder and political pressures on Barclays, which resulted in the resignation of the bank's CEO, COO (previously the head of the investment bank) and the stated intention of the Chairman to resign, could lead to broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture. Although this could have potentially positive implications over the longer term, the uncertainty surrounding such a change in direction is credit negative in the short term. In addition, Moody's believes that the bank could be challenged to replace the three senior staff and in particular find a new CEO who not only has a sufficient understanding of the investment banking business to run Barclays, but also has the credibility and ability to swiftly address the weaknesses that the LIBOR incident revealed and stakeholders' perceptions of the investment bank.

0805 BST: Markets mixed

FTSE Eurofirst 300 little changed at 1,045.34 and we're seeing little impact on the overnight markets to either the FTSE 100 or the DAX. France's CAC-40 is off around 0.2. percent while Spain's IBEX is down around 0.4 percent. Italy's FTSE MIB is up 0.1 percent.

0750 BST: Good Morning!

We're set for an active session today as twin rate decisions from the Bank of England and the European Central Bank look to either add to or diminish the recent "policy rally" that has supported shares in Europe and around the world most of the past two weeks.

Overnight in Asia stocks were broadly firmer with 0.4 percent gain recorded for the MSCI Asia Pacific Index - taking the regional benchmark past an 8-week high into the European morning. Bond markets, however, indicate a cautious tone to the session, with September Bund futures rising 8 ticks at the open to trade at around 142.40. Financial bookmakers are calling for very modest gains for Europe's major indices as we kick off trading, with just an 8 point pop predicted for Britain's FTSE 100.

Spain will sell 3-year, 4-year and 10-year debt later this morning as part of its second-half effort to raise around €33bn before the end of the year. Today's auction will likely total €2.5bn. Investors will keep a keen eye on how Spain's borrowing costs, particularly at the 10-year sale, will compare to the 7 June effort which cost around 6.04 percent.

We'll also get a reading of German factory orders at 1100 BST and some US employment data - weekly jobless claims - at 1330 BST.