- Bundesverfassungsgericht rules ESM participation is within German constitutional law
- European shares hit 14-month high following decision in Karlsruhe
- Dutch voters head to polls with pro-European Liberals, Labour in virtual dead-heat
- EU plans to unveil banking supervision plans that will include larger role for Euopean Central Bank
- UK employment data shows highest rate since May 2008
1410 BST: All bets are ...
... equal? WSJ has a very interesting tid-bit from yesterday's trading of the Chicago Board Options Exchange Volatility Index, known as the VIX or the "fear index", which topped a record 1.2 contracts changing hands in the last day of trading prior to the German Constitutional Court decision.
"Trades on Tuesday showed no consistent pattern, with investors split on whether the VIX will continue to trade at relative lows or whether it is bound to shoot higher."
1355 BST: Spanish regions' rescue
Reuters reports that Spain's three largest operating banks - Santander, BBVA and La Caixa - will provide the bulk of the private capital for the government's regional rescue fund that it hopes will reach €18bn. Banco Sabadell and Bankia will also contribute, Reuters reports, citing unnamed sources. Commitments will be backed by a guarantee from Spain's treasury.
1305 BST: Back from Lunch!
With an interesting take from Barclays on the German court ruling:
Importantly, the court found that direct ESM access to ECB refinancing operations ("banking licence debate") would be in violation of the law. "As borrowing by the ESM from the European Central Bank, alone or in connection with the depositing of government bonds, would be incompatible with the prohibition of monetary financing entrenched in Article 123 TFEU, the Treaty can only be taken to mean that it does not permit such borrowing operations.", the court stated.
The caveats now need to be specifically included in the ratification process of the ESM laws, and it is still unclear, at this stage, how this will be achieved. Legal observers, commenting on the court's ruling, expect this to be a matter of days, especially if it should be sufficient for the Federal President to add these points as accompanying text when he signs the laws. But it is also possible that the Bundestag may have to get involved again, and other ESM member states formally consulted about the caveats. Nevertheless, Eurogroup chief Juncker announced that the ESM should be operational by 8 October.
1200 BST: Keying on jobs
Bank of England policy maker Ben Broadbent says monetary policy should focus on employment, not output, in the medium term. Speaking to Durham University's business school, Broadbent says:
"We should set policy not just on its ability to affect demand but its capacity to improve the flow of finance in the economy as well ... second, as monetary policymakers, we should probably pay less attention to movements in output and relatively more to changes in employment," he continued. "We're likely to want to ease policy if employment falls and to tighten it if employment growth improves.
Here's the text of his speech from the Bank of England website.
1130 BST: Merkel comments
German Chancellor Angela Merkel makes her first public comments on the Constitutional Court's decision this morning, telling the Bundestag that the ruling sends a "strong signal" to the rest of Europe with respect to Germany's commitment while at the same time offering the rights and protections needed for both taxpayers and parliament. She adds (being the skilled politican that she is) that crisis countries must take the lead in solving their financial problems.
No mention of the fact that her own government's lack of consultation with rivals on the ESM was the main reason for the Court's involvement in the first place ...
1125 BST: Sterling surge
The pound has driven to a four-month high 1.6132 against the US dollar this morning fueled by both the German court ruling-rally and the (much) better-than-expected employment data from the UK.
Here's how RBS economist Ross Walker interprets the data:
Overall, a firmer than expected set of employment data. We had anticipated some Olympics boost to employment in our forecast (+200k) but the outturn was even stronger (+236k). Time will tell how much of this simply stemmed from temporary Olympics related activity and, therefore, unwinds. Although there is evidence of an Olympics effect - the disproportionate increases in part-time employment and employment in London - this is not the whole story in these data. Perhaps we should learn to stop worrying so much about the adverse productivity/unit labour cost data and, if not love the employment figures, then at least acknowledge that they are ultimately a more important macroeconomic indicator than GDP?
1110 BST: Back to Greece
ekathimerini, the Greece-based English-language daily, reports that the country's key lenders, the so-called Troika (ECB/EU/IMF) are seeking to impose a longer working week and an increase of the retirement age to 67.
1100 BST: Full text ...
... of the Bundesverfassungsgericht's decsion can be found here: http://www.bverfg.de/entscheidungen/2012/9
1055 BST: The price of time
Spain's economy secretary, Fernando Jimenez Latorre, says the new market calm created by the ECB's verbal intervention means his country won't rush a decision to seek financial support from the EU via the European Stability Mechanism. He says, according to a Reuters report, that he's more pressed to arrange bank participation in an €18bn credit line that will ease refunding needs for Spain's 17 semi-autonomous regions.
Speaking of regions .... the streets of Barcelona were packed last night with several hundred thousands of Catalans demanding independence from Madrid as they celebrated the region's unofficial national holiday. Last month, Catalan's governors said they'll need to tap around €5bn in financial aid from the federal government - but would not, under any circumstances, agree to political conditions that might be tied along with the support.
How exactly Madrid will face-down that demand - and, one assumes, similar rhetoric from Valenica and Murcia - while simultaneously seeking a similar "no strings attached" funding from the European Union remains to be seen.
1040 BST: German bond auction
Yields are moving in the opposite direction for Germany after the Bundesverfassungsgericht's ruling: a €4bn 5-year Bobl sale this morning hit an average yield of 0.61 percent - still incredibly cheap funding for such a maturity but nonetheless nearly doulbe the 0.31 percent Germany paid at its last similar auction. Demand for the debt also fell, with €1.4 bid for every €1 for sale - compared to a so-called "bid-to-cover" ratio of 2.6 in the prior auction.
1035 BST: Stocks at 14-month high
The broadest measure of European shares hit a 14-month high today with the FTSE Eurofirst 300 rising 0.5 percent to 1,113.15 following the German Federal Constitutional Court's decision to allow its taxpayers to fund the ESM with certain conditions. We're also seeing a nice pop in the DAX (+0.7 percent) and full percentage gains in Spain and Italy's benchmark indices.
1030 BST: Yield drop
Italy's Tesoro wasted no time in tapping into the new optimism that's gripping European bond markets, raising €9bn in a one-year treasury bill auction at a rate of 1.69 percent - some 108 basis points lower than it previous sale last month and nearly 300 basis points lower than in June. It also sold €3bn in three-month bills.
0955 BST: Bond market moves
Spanish benchmark 10-year bond yields have fallen 11 basis points to 5.62 percent since the German court decision, according to Tradeweb data, while Italian 10-year yields are down 7 basis points to 5.03 percent.
The last we've heard, however, from both nations' leaders, is that neither is prepared to ask for full EU/IMF aid unless they're completely satisfied with the conditions it would require. What we're seeing now, of course, is the market reaction to the ECB's verbal intervention: if it works for a long enough period of time, Spain and Italy won't need to access the ESM because their capital market access won't be impeded (it'll be expensive, of course, but not prohibitive, especially at the shorter-end of the maturity curve, where the ECB says it will target its purchases.).
Spain's Prime Minister, Mariano Rajoy, seems to agree: telling the Finnish press that he'd like to use the ECB's help, he's just not so keen on asking the EU for a bailout. "In addition to growth, the only option I am considering is using the central bank's announced mechanism," he was quoted as saying to Finland's Helsingin Sanomat.
0945 BST: Court decision reaction
Given to Reuters from:
Ion Marc-Valahu, a fund manager at Clairinvest in Geneva:
"The conditionality is a bit more on the negative side. The maximum liability is a bit disappointing. But the risk premia have been compressed over the last two months and equities have benefited and they should continue to benefit from this overall positive outcome."
Markus Huber, a senior trader at ETX Captial in London:
"Not much of a surprise and some profit taking at some point is certainly on the agenda, however long term it is certainly positive for the market as it removes uncertainty and therefore makes the ESM a more effective tool in combating the European financial crisis, especially if the situation concerning Spain is start to get worse again."
and to the IBTimes UK from:
Stephen Pope, managing partner at Spotlight Ideas:
The short term view is that this is positive and one can see that the European markets advanced and the EURUSD recovered quickly from a quick dip. Peripheral debt yields also eased by 2bps whilst German debt has fallen as money leaves the safe havens. European equities have bounced as well in a signal of short term relief. In fact the decision and conditions were well priced in. In the medium and long term the issue is how will this affect...if at all...further German integration into a closer European "Political Union".
0935 BST: Very strong UK jobs data
August jobless claims fell the most in two years, according to the Office for National Statistics, taking the unemployment rate to 8.1 percent. The *employment* rate is 71.2 which is up 0.5 percent on the quarter and the highest since May 2008.
0920 BST: Court rules in favour of ESM participation ...
.. but with conditions: ESM funding must be explicitly capped at €190bn and both houses of German parliament must be informed about ESM decisions, which should include bond purchases.
The Euro has spiked to a four-month high of $1.2888 against the US dollar while Bund futures fall a few further ticks to a session-low of 139.79. We're also seeing improvement in Italian bond futures (up 28 ticks to 105.5).
0910 BST: Court in session
Bundesverfassungsgericht has convened and President Andreas Voßkuhle is reading some legalese regarding the various motions and injunction requests ... Euro is trading at a session low of 1.2815 and Bund futures are 55 ticks lower at 139.83.
0850 BST: A fairly big "if" ...
European Commission President Jose Manuel Barroso, speaking to parliament in Strasbourg, says Greece can be saved f both itself and its lenders dispel doubts about its ability to be rescued. "I believe if Greece stands by its commitments it should, as a member of the European family, stay in the euro area," he said, before adding that the ECB needs to play a larger role in the broader European rescue.
0845 BST: "ja ... adber"
...there seems to be limits to how much more the German Constitutional Court can strengthen therole of the parliament with a 'Yes-But' ruling. Possibilities that have been discussed include demanding opt-outrights, or setting some form of 'maximum liability' whichwould limit future rescues of large countries to an initial financial aid programme. Crucially, we will be looking outfor any signals of when a possible new constitution wouldbe needed in Germany in case of further transfer of powers or debt mutualisation. Such changes would in alll ikelihood require a referendum, something which has been discussed over the summer but is unlikely to happen before next year's election. Consequently, the Court's ruling is expected to shed some light on the balance between Germany's constitutional protection of human rights (national democracy) and commitment to a united Europe.
- Societe Generales economist Anatoli Annenkov
0825 BST: It ain't just "ja" or "nein"
Investors - as evidenced by a 99 percent response rate to an RBS poll - have no doubt the German court will allow the Bundestag to ratify the ESM. In other words, the key component of today's decision is fully anticipated. The devil, as ever, is in the detail.
Firstly, the Court could rule that Germany needs deeper oversight on ESM spending - a demand that would mean the nation that least supports the fund's concept will be forced into the role of its main director. Pair that with the ECB's plan to use the ESM as the exclusive conduit for its "Outright Market Transactions" plan (which, again, Germany detests) and you have the kind of political paralysis that will slow the ESM's "nimbleness" and make it even less palatable for country's like Spain and Italy to seek protection from it.
Secondly, the Court could demand that parliament give greater voice to the German people on matters of Eurozone integration, again creating a new layer of deliberate process that slows the path of much-needed (critical?) fiscal union.
And, as RBS notes in a research paper, German lawmakers have already promised a cap on ESM funding by taxpayers of €190bn. With Mario Draghi promising "unlimited" bond purchases by the ESM, how long will that money last under a worst-case scenario (in which Spain and Italy both request assistance)? And once its run dry, how likely is it that German lawmakers will be able to ask their constituents for even more cash?
This latter point in particula rseems to have been missed in the wider democratic debate about ECB bond purchases, namely that since an EFSF/ESM programme (either precautionary or a fullbailout) is a prerequisite for such purchases, giving the German parliament an effectiveveto on ECB purchases.
0805 BST: Stocks open flat
Okay, stocks can't open "curved" so it's not fair to say they open "flat", either (as an old editor of mine used to lecture) so let's say they're "little changed" instead. The FTSE 100 is up a point or so to 5784.5 while we're seeing slightly more advanced gains in France (+0.2 percent for the CAC 40), Italy (0.2 percent for the FTSE MIB) and Spain (0.2 percent for the IBEX).
German bund futures are on the back foot, falling 34 ticks at the open at 0700 BST to 140.01. It will be interesting to see how the German court ruling will affect a planned five-year bond sale by the German finance ministry, which is due sometime later this morning.
0750 BST: Good Morning!
European market direction will be dominated by three major events today - starting with perhaps the most important at 0900 BST, when Germany's Federal Constitutional Court is set to rule on the parameters in which the country can participate, both politically and financially, in the European Union's permanent bailout fund, the European Stability Mechanism. Investors are betting the Court will likely allow Germany to be involved - but will also create conditions that will strengthen parliament and protect German taxpayers.
We'll also see voters in the Netherlands head to the polls to elect a new leadership after the collapse of Prime Minister Mark Rutte's government last spring in the face of opposition to his proposed austerity plans. Rutte's Liberals are expected to win enough seats to form a coalition with Diederik Samsom's Labour Party, side-lining anti-European parties on both the left and the right of Dutch politics.
And we'll also hear more detail regarding the European Union's plans to create a single oversight structure for the region's financial services sector, which is expected to involve the significant participation of the European Central Bank. Investors will be keen to see what kind of role national regulators of the European Union's 27 members will play in the new arrangement, as well as what sort of safeguards the nine nations that don't use the single currency - including the United Kingdom - will be granted.
In market news, Asia shares traded firmly throughout the session, with the broadest measure of performance, the MSCI Asia Pacific Index, adding around 0.1 percent to trade at 119.31 - although the benchmark was up by more than 1 percent during the peak of trading. European shares are set to open with a cautious tone and likely won't find direction until after the German court decision.