On Monday, rating agency Moody’s cut the debt ratings of six European countries and warned it may cut the triple-A ratings of France, Britain and Austria.
It cut the ratings of Italy, Portugal, Slovakia, Slovenia and Malta by one notch and downgraded Spain by two notches, from A1 to A3.
Moody’s attributed its decision to growing risks from Europe’s debt crisis – “the uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic…
Read the full article on forexblog.oanda.com.
February 14, 2012
Moody’s Cuts European Ratings
February 7, 2012
Market Outlook for February 7, 2012
Recap of the Latest Global News
By Cory Vi & Andrew Su on Feb 7, 2012
Markets eased yesterday as the Greek government continues to struggle to make the necessary austerity budget cuts to qualify for more financial aid and avoid an ever more likely default. Pressure is mounting on the Greeks to meet the conditions of the EUR 130 billion bailout as PM Papademos negotiates into the second day with the so-called troika. Chancellor Merkel made her frustrations clear by saying “I can’t understand why we need a few more days. Time is running out.” The French and Germans are coming up with increasingly ‘creative’ solutions to the Greek problem by yesterday proposing the setting up of an account for Greek interest payments to ensure that lenders are paid. We aren’t sure that guaranteeing interest payments that are already highly discounted on junk debt will do any good. The EUR is largely unchanged during the Asian and is trading at 1.3120.
Nicolas Sarkozy said at a meeting in Paris that allowing Greece to “go bankrupt is not an option.” It is messages like this that undermine the process that the Europeans are attempting to undertake. Leaders need to let the Greek government know that bankruptcy is an option if they do not comply with the conditions of the bailout package. If bankruptcy is not an option than the Greeks will simply continue to flout agreements in an attempt to get a better deal while the relatives continue to support the black sheep of the family at all costs. Today, the Reserve Bank of Australia surprised investors by keeping its benchmark rate unchanged at 4.25%. The market had priced in a 0.25% cut and the decision saw the AUD rise sharply from just above 1.0700 before the announcement to as high as 1.0825.
US equities eased yesterday with the Dow Jones falling from almost 4 year highs on renewed concerns over the Greek refinancing and debt swap deal as a planned meeting of Greek leaders was delayed as a joint response had yet to be agreed upon. The S&P 500 was largely unchanged at 1,344. Asian stocks closed lower today while European bourses are down 0.5% in mid-trade.
February 3, 2012
Week in FX Jan 29-Feb 3
CHF continues to rise despite the EUR’s resilience. The SNB’s pledge to hold the CHF 1.20 cap will soon be tested. Since its inception last September it has worked, however, in the past few weeks’ market sentiment has changed dramatically. China considering greater involvement in EFSF and ESM program has done little to support currency so far.
The market has aggressively been playing the risk reward trade at these levels by selling CHF aggressively and waiting for the imminent announcement. The threat of a deep recession in the problem Euro-zone is only making this trade more difficult to stomach. The region has yet to feel the true impact of the implemented austerity measures to reduce their budget deficits. Euro banks tightening their lending policies to both corporate and private interest over the last three months is putting a tighter noose around mainland Europe. The ECB’s increased liquidity policy is not working.
All of this is pointing towards the Euro sentiment plummeting again-CHF and JPY positive. The Franc’s outright performance against the dollar is not exactly helping the SNB. Bernanke’s dovish tone has driven the yield spreads between the US and Swiss even lower and made the CHF more attractive. It seems that all the cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk, however, the rumored $20+ “yards” of stop-loss orders below the cap figure should be cleaned out if the SNB wants to teach the market an expensive lesson.
Below are some other highlights of the week:
EUROPE
- EU: The dollar opened the week much stronger against EM and G10 currencies. The risk selloff started during the Asia session, as markets re-opened after the Lunar New Year holiday.
- EU: Italy issues +€7.5b in 2016-2022 bonds ahead of their largest redemption for 2012 (February 1st +EUR25b). The auctions were well received, however, post interest saw the ECB buying product.
- EU: Portugeuse 5-year product manages to record the highest yields for the post-Euro era of +22.69%, fueled by the turn of events in Greece. The market perception seems to accept a Greek default as a given.
- EU Summit: A leaked German proposal for Greece to cede control over its budget in return for financial aid “casted an uncertain outlook on PSI negotiations.” Market continue to question “the soundness of the recent risk rally.”
- WSJ reported that a Greek PSI deal ‘may’ be concluded this week. This of course is subject to Greece securing a new financing program from the IMF and EU.
- EU: Mixed European confidence surveys contributed to softening risk appetite at the beginning of the week. Services confidence improved while industrial confidence failed to pick up from the recent lows.
- EU: Unemployment in the Euro-zone hits a record high +10.4%.
- EU Leaders: They have agreed to accelerate the set up of a full time +Eur500b rescue fund (EMS and EFSF) and backed a deficit control treaty. Initially response saw European sovereign markets responding well to the summit outcome, with Italian 10-year yields reversing about half of the previous sessions rise.
- EU: The brief Euro-summit has been viewed as a success relative to modest expectations, allowing the market to eliminate some event risk for the euro system.
- GRE: Greece PSI remains elusive and is continuing to generate market anxiety.
- CHF: The SNB’s December balance sheet report confirms that policy makers used FX swaps to add CHF liquidity during the course of December last year (+CHF 20b).
- CHF: The SNB’s balance sheet also revealed small changes to the FX reserve breakdown by currencies (EUR’s share from +54.8% in Q3 to +52.1% in Q4-in favor of dollars and GBP). At current levels, risk reward favors long EUR/CHF.
- UK: The market is looking for QE expansion next week in the UK, mostly on the back of money growth remaining very weak. M4 ex-OFC contracted -0.7%, m/m. Net consumer credit declined -£0.4b, while mortgage approvals at 52.9k disappointed vs. the consensus for 54k.
- NOK: Norway’s credit rose +6.7%, y/y, above the consensus forecast for +6.5%. Retails sales growth remains solid in annual terms at +2.6%, y/y. The futures market expects the Norges bank to remain resilient as data support call for rates “on hold” at the next meeting.
- NOK: The Norges Bank will purchase foreign exchange equivalent to +NOK350m per day for the Government Pension Fund Global in February. This amount is not large compared to the historical average.
- EU: Stronger PMI’s in Europe and China allowed risk sensitive deals to pressure the dollar and yen mid-week.
- EU: The Euro-zone PMI was revised a tad higher from the initial estimate to 48.8. Digging deeper, the German PMI was also revised higher, while the Italian PMI at 46.8 printed well above the consensus forecast of 45.3. Spain’s was not to be left behind, its PMI rose to 45.1 from 43.7. The data suggests that the business climate is at least stabilizing in the region, including in the systemically critical periphery countries.
- Scandinavia, UK and CE3 PMI’s increased strongly. In the UK perhaps further QE becomes questionable? Swedish and Norwegian prints swung back above 50 (expansion).
- CHF: In contrast, Swiss PMI decreased sharply to 47.3. They also managed to report a weak retail sale (annual growth rate dropped to +0.6% from +1.8%).
- EU: Consistent rumors that a Greek PSI deal has been struck (with a 72% NPV haircut) has pushed investors to strap on more risk. What about the collective action clauses?
- EU: There are reports that the PSI deal is being held up by differences between Germany and the IMF. When the “collective actions clauses” are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement.
- EU: EU Juncker says that Greek PSI talk are ultra-difficult. The lack of tangible progress in the talks seems to be taking a toll on currencies geared to Europe – CE3, Scandis, ZAR, and TRY.
- CNY: Premier Wen has indicated that China is still researching how to participate in the EFSF and ESM program. China supports European effort to stabilize Euro and it may increase their participation via the rescue funds to help resolve the European debt crisis.
- CHF: Bernanke’s dovish tone has driven the USD/CHF yield spreads even lower and is making the CHF more attractive. These cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk.
- EU: Spain and France managed to issue bonds, at the front end and in the belly of the curve, to strong investor demand.
- GBP: UK construction PMI fell to 51.4 in January from 53.2 (below consensus for 52.5). Manufacturing and services surveys will carry a larger weight for the next BoE meeting (February 9). Analysts are looking for an expansion in the QE program next week based on weak hard data in Q4 and very soft money growth.
- EU: The Euro area services PMI was revised fractionally lower from the flash estimate, it now reads 50.4 vs. 50.5.
- EU: Greek PSI talks continue, with markets increasingly ignoring statements suggesting progress is being made. Latest reports indicate a deal could be submitted to the EU and IMF over the weekend, and approved at a Eurogroup meeting next Monday.
- GBP: The UK Services PMI rose to 56.0 in January from 54.0 in December, the strongest level since March 2011.Next week we get to see if extra QE is to be applied. Unchanged BoE policy or a signal to an end of QE would clearly be positive for GBP as a EUR alternative.
- EU: Euro-zone retail sales fell for a second month in December, down -0.4% m/m and -1.6% y/y. Retail sales is again strong proof that the EUR’s 17-nations are threatening to return to recession, if they are not already there. In the 27-member European Union, sales rose +0.3%; largely due to a +0.4% rise in the UK and a +0.7% uptick in Poland.
Land of the Rising Yen
Japan’s Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing. He and his policy makers can breath a small ‘sigh-of-relief’ after NFP, the market decided to sell the JPY outright! How long is this going to last? These specific market moves are providing better levels to own the currency. Markets have taken the Ministers comments in their stride. Intervention is a rising risk for USD/JPY shorts if the pair falls towards that psychological 75 benchmark. It seems that exporter related sales will continue to cap any upside potential for the dollar. So, fears that the Greek Prime Minister may resign, the uncertainty that the Dutch Government may not want to write down loans to Greece will again make the yen more attractive.
Below are some other highlights of the week:
Asia
- CNY: Chinese markets resumed trading following the week-long Lunar New Year holidays. Premier Wen said that the Chinese government will enhance the elasticity of the CNY exchange rate in both directions.
- JPY: Japanese Finance Minister Azumi warned against a renewed rise in the yen and vowed to take firm steps against excess volatility and speculative moves in the FX market.
- JPY: Japans December IP rebounded +4.0%, m/m, following the -2.7% fall in the previous month (the ‘flood’ knock effect-on from Thailand).
- JPY: Yen remains sensitive to G10’s yield compression.
- KWN: Korean IP growth fell to +2.8%, y/y in December from +5.8% in November. This is very much inline with soft export growth in December.
- SGD: Singapore’s unemployment rate remained at +2% in Q4, despite weakness in IP and GDP growth for the same period. This suggests that the tightness in the labor market is partly structural.
- CNY: China’s manufacturing PMI rose +0.2pt to 50.5 (higher than the consensus forecast of 49.6). Importantly, the PMI was much stronger than the seasonal pattern for a -0.7pt fall. New orders up +0.6pt to 50.4 while inventory fell -2.6pt to 48.0. Export orders fell -1.7pt to 46.9 while input prices rallied +2.9pt to 50.0. The data reduces the scope for monetary easing.
- KWN: Korea’s CPI inflation fell to +3.4%, y/y, last month (foretasted for +3.6%). Core-inflation also slowed to +3.2%, y/y, from +3.6% in December. Digging deeper, exports fell -6.6% in January (first negative growth in three-years), providing a – $2.0b trade deficit. Note: Asian data may be distorted by the lunar New-Year celebrations.
- IDR: Indonesia CPI inflation eased to +3.7% in January as expected. Core-inflation was broadly unchanged at +4.3%, y/y. The futures market expects their Central bank to ease monetary policy further, cutting rates -25bps to +5.75% next week (February 9). Export growth fell to +2.2% in December while import growth surged to +24.3%. The data has narrowed the trade surplus. Is their economy in the first stages of over heating?
- TWD: Thai CPI inflation fell to +3.4%, in January (as expected). Futures market again expects the Bank of Thailand to cut policy rates by another -50bps to +2.5% by the end of Q2.
- JPY: Comments from Japanese officials are finding it difficult to halt the yen gains. The perception that JPY is one of the most liquid currencies in the world is been seen as a sound alternative to the two prime reserve currencies, EUR and USD. Their stability and debt-led debasement issues are to blame. This would suggest that it’s only a matter of time before the BoJ appears in the markets directly. A similar storyline is being played out in Europe with the SNB.
- CNY: China’s non-manufacturing PMI fell -3.1pts to 52.9 in January (less than expected). The HSBC Services PMI was unchanged at 52.5 for a third straight month in January.
- JPY: Japan Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing.
- INR: RBI’s Deputy Governor Gokarn said that the central bank may buy dollar rupee to inject INR liquidity.
NFP no license to apply risk
Analysts’ employment expectations were blown out of the water on Friday. NFP produced a stellar report, creating +243k new jobs, pushing the unemployment rate down two ticks to +8.3%. Risk has been quickly applied and added to in the markets. The loonie is a shining example of a growth currency outperforming, especially on the back of its own disappointing employment report. However, beware of the extremely bearish risk factors lurking in the background i.e Euro debt crisis, slowing global growth and Iran nuclear concerns, which remain largely ignored, before wagering it all on risk. It’s a good start to 2012 for the Obama administration, but not a trend just yet. The headline print has managed to produce some blood on the “street”, they had predicted a more bearish print.
Below are some other highlights of the week:
Americas
- USD: This week we saw incomes pick up during December, +0.5%, however, individuals chose to increase savings instead of spending, showing a caution that will likely keep the US economy in slow growth mode throughout 2012. November spending was unrevised at +0.1%.
- USD: Unexpected poor Case-Schiller Home Prices and an unexpected Chicago PMI managed to trigger some macro-money profit taking on the last day of the month. Case-Schilller November 20-city HPI fell -1.3%, m/m. The housing market remains sluggish despite lower prices and interest rates, an abundance of foreclosures and tighter mortgage requirements.
- USD: Chicago PMI was 60.2 compared with a forecast of 62.2. The forward looking component, the new order index, dropped in January to 63.6 from 67.1.
- USD: US January consumer confidence retreats to 61.1 from 64.8, giving back some of the huge gains witnessed over the past two-months. The fallback was concentrated in consumers views of the current economy. The present situation index (current economic indicators) dropped to 38.4 from a revised 46.5-“consumers are more upbeat about employment but less optimistic about business conditions and their incomes.”
- CAD: The Canadian economy shrank for the first time in six-months, dragged down mostly by a decline in energy output (oil and gas fell -2.5%), down -0.1% to +CAD$1.27t in November. The BoC released forecasts from two-weeks ago was for GDP growth to slow to +2% in October through December from +3.5% in Q3.
- USD: ADP reported that Private Sector Jobs with small businesses lead the hiring +95k. However, the December print was revised lower to +292k from +325k. Its a “slow and steady pace” that could bring down the unemployment rate, but not rapid enough to return payrolls to their pre-recession peaks anytime soon.
- USD: January ISM rises near to expectations of 54.1, proof that growth picked up last month. Digging deeper, prices gained ground after contracting in December, and hiring grew at a slightly slower pace. Factories continue to be a consistent contributor to overall growth.
- USD: The number of US workers filing new claims for unemployment benefits declined last week (-12k to +367k), continuing the mostly improving trend seen in nine-months. The four-week moving average decreased by -2k to +375,750, remaining below that psychological +400k benchmark that’s required to add jobs to the economy.
- USD: In his House Budget Committee testimony this week, Bernanke has not changed his tune, again stating that the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term US budget deficit.
- USD: Dallas Fed Fisher (nonvoter) reiterated his opposition to further QE. He said that QE3 is not needed and that it would complicate the eventual tightening policies.
- CAD: Employers hired far fewer workers than expected in Jan (+2.6k vs. +23k) and the jobless rate rose unexpectedly to +7.6% from +7.5%. The data reflects an economy that’s slowing and is consistent with the BoC keeping rates unchanged. Despite creating +129k jobs last year-growth was in the first six-months. (Full-time jobs declined by -3.6k, part-time rose +5.9k, private and public sector increased by +39k while self-employed fell-37k).
- USD:NFP produced a stellar report, sideswiping most analysts expectations. Payrolls increased by +243k, m/m, allowing the unemployment rate to ease two-ticks to +8.3%. The breakdown saw manufacturing gain +50k, services +162k and the Government eliminate-14k positions. The hourly income increased +0.2% while the number of hours worked remained unchanged at +34.5.
January 23, 2012
January 20, 2012
Week in FX Europe Jan 15-20
It’s been a difficult week for the Euro ‘bears’; you get downgraded, receive some suspect economic data and fail to agree on a ‘haircut’ in stone just yet (details over the w/d), yet the currency appreciates +150pts from this years lows and in danger of edging even higher. What’s with that?
Many analysts seemed to have factored in a record single currency low print somewhere in their trading strategy calculations. Is this attainable? Much depends on key issues such as the Greek PSI and the forthcoming Euro-area summit. The currency remains susceptible to possible near term policy risks in Europe and fiscal tightening.
For now, the market remain focused on the ongoing Greek private sector involvement negotiations. There are rumored reports that indicate an initial agreement has been reached on a voluntary restructuring, but uncertainty is likely to persist until it becomes clear how widely private sector participants will adopt the plan.
Below are some other highlights of the week:
EUROPE
- Merkel and Sarkozy started the week sounding the trumpets “We must solve Europe’s competitiveness problems”
- EU: Greece dispatches officials to the US for meetings with the IMF. The fear of a default and a subsequent euro-zone exit has overshadowed a mass credit downgrade of euro-zone countries. Athens requires a deal with the PSI within days to avoid going bankrupt when +EUR14.5b of bond redemptions fall due in late March. Talks with its creditor remain ongoing.
- EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
- FRF: French Treasury came to the market a day after being downgraded from AAA to AA+ by S&P’s. They auctioned +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.
- EU: It was not a market surprise that the EFSF program was downgraded from AAA to AA+ late Monday.
- EUR: Stronger set of Chinese growth data managed to push the EUR off this years lows, a couple of days after sovereign credit downgrades. The single currency short term remains elevated!
- EU: The EFSF auctioned +€1.5b of 6-month bills, with a bid-to-cover ratio of 3.1 despite S&P’s downgrade to AA+. The Eurogroup has agreed to discuss the implications of trying to restore the AAA status. Spain also issued +€4.9b of 12- and 18-month bills with strong support.
- ECB: Euro-zone inflation was revised a tad lower to +2.7%, y/y, from the +2.8% initial estimate. Inflation had been boosted over the past three-months by VAT hikes and electricity prices. The ECB projects inflation to slow to +2% this year. Market does not expect an imminent rate cut. FI is pricing in one for March.
- GER: Despite remaining at depressed levels, the German ZEW expectations recovered sharply to -21.6 from -53.8 last month (sharpest increase in history).
- UK: UK inflation slowed to +4.2%, y/y, from 4.8% in November, in line with consensus. Last month, the core-inflation happened to fall to +3.0% from +3.2%. Not necessarily obstacles for expanding the QE program, but recent growth indicators suggest the risks are now for less rather than more QE next month.
- IMF: Market reports indicated that the IMF will seek to increase resources by $1Trillion, drawing largely on the BRIC economies, Japan and oil exporters. This news provided some risk appreciation and perhaps even more if augmented by a fully functioning ESM. Do not expect automatic or willing contributions!
- EU: Negotiations on Greek private sector involvement resumed midweek. It’s been reported that Greece is close to agreeing to pay +32c per EUR of government debt. Aiding the negotiations, Greek officials have signaled increased willingness to use collective action clauses if participation in PSI falls short of 100%.
- GBP: UK jobless claims surprised low at +1.2k in December vs. an expected +7k and continuing the positive trends for the unemployment rate. However, the ILO unemployment rate increased to +8.4% from +8.3%.
- EUR: The market risk rally remains intact, despite the poor data out of Australia. The CE3 block and Scandinavia currencies continued to outperform on the week.
- EUR: There was a successful longer dated issuance in both Spain and France. Spain issued +€6.6b in 5-10yr bonds while France placed +€7.9b worth of 2-4year paper and +€1.5b in inflation linked bonds. Despite the auctions yielding “strong” bid-to-cover ratios, the auctions failed to generate market momentum in FI.
- GBP: UK retail sales ex-fuel rose +0.6%, m/m in December. With sales remaining subdued, analysts expect falling inflation to help real consumer income and support future data releases. Cable is expected to remain under pressure.
EUR Shorts Suffer with Bond Bears
US data is beginning to highlight the disconnect between the US and the Euro-zone. As FX traders hone their Fixed Income (FI) skills with the Euro sovereign debt issues, even they must sympathize with the frustration of the US bond bears. The benchmark 10-year Treasury yield has defied improving US data, and straddles the +2% yield for most of this year. It’s another crowded market trade that mirrors the frustrations of the ‘short’ single currency strategy. Euro-zone concern remains in the driver seat while US data for now, acts like “Robin” of the relationship. Yields for Treasuries or other ‘safe haven sovereign debt’ are not in danger of rallying any time soon until the Euro-zone stabilizes.
Below are some other highlights of the week:
AMERICAS
- US: Martin Luther King Day on Monday was respected by the markets; it was also to be the lead for a quiet beginning of the week, or so we thought. Lack of liquidity led to thin markets, producing volatility that allowed dealers print a new yearly EUR/USD low.
- CAD: New Motor vehicle sales fell-1% in November to +137.6k units, offsetting the October and September gains. Truck sales fell -1.3% to +80.4k units.
- USD: January Empire State Index on manufacturing conditions in New York of 13.48 was stronger than the consensus of 11. It was a rise from 8.19 in December and a third straight improvement from a series of negatives.
- CAD: The BoC, as expected, kept O/N rates on hold at +1%, reporting there is considerable monetary policy stimulus in Canada. Carney sees less slack in an economy that is now expected to return to full capacity by the 3Q in 2013. Inflation was seen as marginally firmer.
- USD: US wholesale prices fell in December as food and energy costs declined significantly. PPI (manufactures and wholesales) declined a seasonally adjusted -0.1%. A slowdown of costs may give the Fed more wriggle room. Core-PPI increased by +0.3% (the largest increase in seven-months).
- USD: November TIC report recorded a net rise of $59.8B. Foreign holdings saw a large rise from Japan $59.9b and a small decline from china -$1.5B.
- USD: December Capacity Utilization increased +0.3pt at 78.1%.
- CAD: BoC Monetary Report. There was a major shift in tone in the US outlook that sees US growth forecast improve to +2% in 2012 from +1.7% in the previous MPR. The other main take away is a downgraded Europe forecast with growth now to be in recession territory at -1% in 2012 from +0.2% in the previous report.
- BRL: The Brazilian Central Bank (BCB) cut the Selic rate by -50bp to +10.50%. “A moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012″. BCB seems to be signposting further cut rates. Analysts are expecting another -100bsp by March.
- CAD: Canadian Manufacturing shipments advanced at a faster pace in November than forecasted, up +2% to $49.1b. Robust gains were seen in the petroleum and coal industry.
- USD: US December CPI ex-food and energy at +0.1% was unchanged.
- USD: December Housing starts were weaker than expected with a -4.1% fall to +657k, while building permits at +679k were down a marginal -0.1%. Starts declines were due to a correction lower in multiples.
- USD: Weekly initial claims plummeted -50k to +352k, while continuing sank to +3.4m. US data is beginning to highlight the discount between the US and the Euro-zone.
- USD: The Philly Fed disappointed with a 7.3 print (10.3). However, there were pockets of strength, business conditions were up, and employment was moderately higher while new orders and prices paid dropped.
- CAD: Consumer prices declined in December at the fastest in six-months. On a monthly basis, both the CPI and the core fell in the month, -0.6% and -0.5% respectively. For 2011, Canada’s average inflation rate hit +2.9% (the biggest increase in eight years, 2010 was +1.8%).
- CAD: Wholesale trade recorded a surprise drop in November (-0.4% to +$48.4b). The market had been expecting a+0.5% gain.
- USD: Existing home sales came in a little lower than expected. Sales rose +5% in December to annualized pace of + 4.61 m units. Housing inventory fell to a 6.2 months supply.
January 16, 2012
Debt Downgrade Jeopardizes Eurozone Recovery
Friday’s sovereign credit rating downgrade by Standard & Poor’s brings a new sense of urgency to the European debt crisis. The move also shines a spotlight on the region’s abysmal adherence to the Eurozone’s fiscal management rules as leaders prepare for yet another European summit on the debt crisis slated for January 30th.
Greek officials will actually get a head start on the summit as they are schedule to meet on January 18th following a series of unsuccessful discussions last week to reach an agreement with the country’s largest creditors. Last fall it appeared that a deal had been arranged that would see Greece’s largest creditors receive 50 percent of the face value on Greek debt. This arrangement was expected to reduce Greece’s deficit to 120 percent of GDP by the end of the next decade, but the deal now appears to be in question. Talks between the banks and the Greek government are scheduled to resume on January 18th.
Failure to come to terms on the debt discount places the release of the next tranche of emergency funding to Greece at risk. Greece has more than 14 billion euros ($17.8 billion) in debt due to mature over the next two months and if unable to meet the obligation, Greece would have no option but to enter into a full and uncontrolled default. Few expect it to come to this, however, as a calamitous default of this nature would spread debt contagion throughout much of the Eurozone at a rate beyond the region’s capacity to maintain.
Europe’s Largest Economies Suffer Credit Downgrade
In actual fact, few were surprised when Standard & Poor’s slashed credit ratings for a total of nine Eurozone countries late last Friday. Of the region’s top five economies, France and Austria both lost their coveted triple-A ratings leaving only Germany at the top tier. Italy and Spain were further downgraded to below investment grade status.
Citing deteriorating economic prospects and the anemic attempts so far to meet austerity targets and reduce deficits, S&P also placed the countries on a “negative” credit outlook leaving the door open to additional downgrades.
Following the official notice of the demotion, European officials rushed to minimize the impact of the historic downgrade. German Chancellor Angela Merkel said she believed the credit action would prove to be positive as it would urge member states to agree to a “financial compact” to help salvage the union and the euro.
Markets were less optimistic and the first full day of trading following the downgrade was mixed. European stocks were up slightly near the end of the day, while markets were off by the mid-way point in the North American trading day. Still, the real test is expected to come tomorrow when Spain will attempt to raise about 6 billion euros ($7.6 billion) in short and mid-term bonds, with another 4 billion euros ($7.6 billion) in long bonds.
“The rating downgrade is definitely going to create headwind for the Spanish bond auction,” Christian Lenk, analyst at DZ Bank, told the Financial Times Deutschland. He said he didn’t believe that the country could “repeat last Thursday’s auction result,” in which it was able to sell twice as many bonds as envisaged at lower interest rates than before.
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Eurozone Braces for Fallout from Credit Downgrades
European leaders are scheduled to meet on January 18th to prepare for yet another summit on January 30th to discuss the debt crisis. No doubt the latest round of sovereign credit rating downgrades and the potential impact of this latest development will be part of the agenda. On Friday, Stadard & Poor’s removed France’s triple-A rating and also cut ratings for several other countries including Spain and Italy.
Source: Bloomberg