(Insider Stories) - Portugal is likely to require further outside help - either in the form of another bailout or via the ECB's OMT program - with the economy weak and bond yields pushing higher after the country's finance minister and foreign minister resigned, leaving the survival of the government in doubt, London-based research provider Capital Economics says.

The following is a report from Capital Economics.

-   Portugal likely to need further outside help

-   Bank of England (12.00 BST) and ECB (12.45) set to leave policy on hold today

-   ... but more monetary easing probably to come from both  

Key Market Themes The resignation of Portugal‘s foreign minister, following the earlier resignation of the finance minister, has put the survival of the government in doubt and threatens the country’s planned exit from its bail-out programme next year.

The bond markets have reacted predictably by pushing Portuguese sovereign bond yields – which had already risen by more than those of other peripheral euro-zone countries over recent weeks – to dangerously high levels. 

With the economy still weak, we have long argued that Portugal would need further outside help, either in the form of another bail-out or via the implantation of the ECB’s OMT programme.

(See, for example, our European Economics Update “Latest Portuguese fiscal plans only buy time”, published on 16th April.)

More generally though, the episode is another reminder that the euro-zone periphery’s troubles are far from over. (Jonathan Loynes)   Meanwhile, the crisis in Egypt has boosted global oil prices and added to the global jitters.

Nonetheless, we continue to expect both Brent and WTI to end the year below $100 per barrel, as global demand remains sluggish, supply is ample, and Middle East worries fade again.

(See our Commodities Update, “Is Is $100 oil here to stay?”, published on Wednesday.)  

Events in the Middle East, as ever, seem to be the wildcard.

Two weeks ago the focus was on Syria.

Brent also jumped then to $106, similar to current levels, but it then dropped back as the prospect of Western intervention faded.

The concerns about Egypt could also prove fleeting.

However, while the crisis in Syria remains by far the greater human tragedy, events in Egypt may have more potential to unsettle the energy markets.

In part this is because the political transition in Egypt seemed to be advancing, but now the country appears to be taking a big step backwards.

This has raised concerns that the uncertainties created by the “Arab Spring” could resurge across the region.

What’s more, even though Egypt has been a net oil consumer since 2008, around 2.5m barrels of crude oil pass through the Suez Canal or the SUMED pipeline each day, in addition to large amounts of petroleum products and LNG.

And unlike Syria, which has been a pariah state for years, Egypt is often a key player in attempts to broker peace across the region.   Nonetheless, we are not going to tweak our oil price forecasts in response to every twist and turn in the ongoing upheaval in the Middle East – for three main reasons. First, events are simply too unpredictable and could develop quickly in either direction.

The latest emergency in Egypt could blow over within days, just as the fears of contagion from the civil war in Syria have faded.

Indeed, the protests in Turkey and in Brazil have already dropped out of the international headlines. Second, even if oil supply from the region were threatened, we would expect any fallout for global oil markets to be more than offset by releases from the vast strategic reserves held by the US and its allies.  

Third, and most importantly, the macro picture has not changed. 

The recovery in the world economy remains sluggish.

Indeed, global manufacturing is likely to continue to struggle as long as oil prices are above $100. In the meantime, while there will be occasional dislocations in individual markets, global supply of energy (gas and coal, as well as oil) is more than sufficient to meet rising demand. Overall, we continue to expect Brent and WTI to end this year below $100pb and fall further thereafter. (Julian Jessop)

What to watch for today: North America

No major data or events scheduled for today (Independence Day holiday).  

Wednesday’s data were a mixed bag. The sharp widening in the trade deficit in May, to $45.0bn from $40.1bn in April, suggests that annualised GDP growth in Q2 may be even weaker than the 1.5% we have been expecting.

The decline in the ISM non-manufacturing index to a three-year low of 52.2 in June, from 53.7 in May, provides further evidence that the economy has lost some momentum.

Taken together with the manufacturing index, which rose in June, these two surveys are consistent with GDP growth of around 1%.   But one positive development was the increase in the employment index to 54.7, from 50.1 in May.

That’s consistent with an improvement in private services payroll growth from 179,000 in May to over 200,000 in June. It also supports the upbeat message from the 188,000 rise reported in the ADP survey of private employment, although this may partly be catch-up after the ADP was too pessimistic in recent months.

Taken together, these surveys suggest that the risks to our forecast that payrolls rose by around 150,000 in June (data due on Friday) probably now lie on the upside. (Paul Dales and Amna Asaf)  

Continental Europe

In response to the recent market developments after the Fed hinted that it could soon taper its QE programme, President Draghi should provide reassurance about ongoing ECB policy support at today’s interest rate press conference (12.45 BST). While we do not expect policy changes this month, Mr Draghi is likely to confirm that the ECB is considering various conventional and unconventional policy options.

We are still pencilling in cuts in both the main refinancing and deposit rates in September. And if the region remains in recession, as we expect, more long-term loans for commercial banks or support for the ABS market could follow soon after.

(See our ECB Watch, “Still mulling more support; exit remains distant”, published on the 27th June.) (Jennifer McKeown)  

Elsewhere, the Swedish Riksbank left interest rates unchanged at 1.0% on Wednesday.

It also signalled that it still expects to begin raising rates in late 2014. However, we still think that the Bank’s economic forecasts are too optimistic.

The Bank expects GDP growth to pick up from about 1% this year to around 2.8% in 2014 and 3.6% in 2015. However, we have pencilled in growth of only 1.5% in 2014 and 2015. Accordingly, we think that the Riksbank will eventually reduce interest rates to 0.5% and not begin to hike until 2015. (Ben May)  

UK The continued positive economic news in recent days makes it even more likely that Mark Carney’s first MPC meeting (12.00 BST) will pass without event.

For example, data released on Wednesday showed June’s CIPS/Markit measure of services activity rising sharply from 54.9 to 56.9. With June’s manufacturing PMI at its strongest level since early 2011 and the construction survey seeing a modest increase, a weighted average of the three CIPS surveys points to the economy growing by 0.5% q/q in Q2.  

Nonetheless, we still think that the new Governor will give the economy more help before long – probably at August’s meeting. The recent rise in gilt yields has underlined the case for the new Governor to introduce forward guidance in order to stem rising expectations of an early policy tightening.

And last week’s extensive GDP revisions left policymakers with even more work to do to get the economy back to its pre-crisis levels, let alone anywhere close to where it could potentially be.  (Vicky Redwood)  

Rest of world No major data or events scheduled for today.  

Key Data and Events Thu 4th     

-    US   Independence Day Holiday - Markets Closed 04.30  Tha  Consumer Confidence (Jun) 08.30  NE   CPI (Jun) 09.30  Spa  Spain to Sell Bonds 11.00  Lat  Industrial Production (May) 12.00  UK   BoE Interest Rate Announcement 12.00  UK   BoE QE Announcement 12.45  EZ   ECB Interest Rate Announcement 15.00  Ecu  CPI (Jun)