S amp P downgrades Spain whilst Spanish jobless rate rises to 24 4

Spanish stocks suffered strong losses as trading opened in Europe after the Standard and Poors downgraded Spain’s credit rating by two notches to BBB+ last night from a previous A rating and data showed that the Spanish unemployment rate increased to 24.4%, pressuring Spanish stocks and pushing up bond yields.

The downgrade from the S&P for Spain was perhaps not necessarily a surprise given the fact that rival ratings agencies has made similar moves of late, whilst the fact that they are keeping Spain on a negative outlook raises the potential for further cuts to come in the medium term.

Continued weak Spanish retail sales, which fell for a 21st consecutive month in March has also weighed on Spanish stocks whilst a rise in the unemployment rate to 24.4% cast a dark shadow over Spain’s ability to turn an economic corner. It is no coincidence that Spanish bond yields have seen upwards pressure today as a result, with benchmark 10yr Spanish bond yields trading back above the important 6% level in early trading.

It’s a sad state of affairs in Spain with now 1 in 4 adults without a job and youth unemployment double that of adults, with 1 in 2 youths unemployed. The speed at which Spanish jobless rates have climbed over the past few years – where four years ago the rate was 9% – is hugely alarming as it shows strong unemployment momentum, whilst the Spanish austerity plans are likely to exacerbate the situation further.

French consumer spending also badly underperformed market expectations today, coming in -2.9% for March against expectations of -1.9% from a downwardly revised growth of 2.9% in the previous month.

Despite the weak data out of the Eurozone, we did see a bounce back for broader European stocks which rallied from their early lows seeing the FTSE 100, DAX and CAC all retrace back towards flat territory after the first hour of trading. That said, trading is likely to be choppy throughout the morning session until we see US GDP data.

US GDP in focus
A key focus will be on US GDP rates at 1.30pm, where US growth is expected to slow in the first quarter to 2.5% from 3% in the prior quarter. Whilst any number below 2.5% growth will likely raise concerns over US growth this year, these concerns could be watered down by the fact that weaker than expected US growth would likely be interpreted by investors as increasing pressure on the Federal Reserve into supportive action in the form of more QE.