- Markets look ahead to results of the EBA’s stress tests expected to be released around 1700 BST
- S&P has warned there is a one-in-two chance it could cut the US AAA credit rating if a deal on raising the government’s debt ceiling is not agreed soon
- According to the chairman of S&P’s sovereign ratings committee, John Chambers, the risk that the US will lose its AAA credit rating in the next three months has risen considerably, even if lawmakers reach an agreement to raise the country’s debt ceiling later this month
Risk-aversion prevailed during the early European trade ahead of results from the EBA's stress tests later, where 10-15 banks are expected to fail the test, together with S&P's warning related to a potential US sovereign downgrade. This resulted in weakness in European equities, led by financials, with particular underperformance seen in the Italian FTSE MIB index, whereas the Italian/German and Spanish/German 10-year government bond yield spreads widened to intraday highs. However, as the session progressed, equities came off their earlier lows, with some volatility observed due to option expiries in key European indices. Elsewhere, EUR/USD received support on the back of market talk of US corporate and Asian names buying in the pair.
Moving into the North American open, markets look ahead to key economic data from the US in the form of CPI, Empire manufacturing, and industrial production figures. In fixed income, another Fed's outright Treasury Coupon Purchase operation in the maturity range of Jul'15-Dec'16, with a purchase target of USD 2.5-3bln.
Many BoJ policy board members recognised that overseas economies pose a growing risk to Japan’s recovery and a few expressed concern about the adverse effects of a strong JPY, according to the June minutes, suggesting the board was becoming more cautious even though it had recently upgraded its view on the Japanese economy. (RTRS) The minutes also showed that 2 of the 9 board members said that there was a need to ease policy further to sustain economic recovery.
In other news, according to a report in Kyodo, citing Japan’s government, Japan’s second extra budget will raise GDP by 0.3%. (Kyodo)
S&P has warned there is a one-in-two chance it could cut the US prized AAA credit rating if a deal on raising the government’s debt ceiling is not agreed soon. Putting the US on negative watch, S&P warned that it would soon cut rating as soon as this month if talks between the White House and Republicans remain stalemated. Any cut would be by one or more notches it added. S&P’s decision to move the US top-tier credit rating closer to a downgrade underscores the need for Congress to raise the debt limit to reach a deal to cut deficits, Jeffrey Goldstein, the US Treasury’s under secretary for domestic finance said. According to the chairman of S&P’s sovereign ratings committee, John Chambers, the risk that the US will lose its AAA credit rating in the next three months has risen considerably, even if lawmakers reach an agreement to raise the country’s debt ceiling later this month. Meanwhile, Moody's notes that if US missed debt payments, their rating could be cut the next day. (RTRS/Sources)
Meanwhile, President Obama gave congressional leaders a weekend deadline to find a way to raise the debt ceiling, but a divide over spending and taxes remained a huge hurdle to a deficit-cutting deal. White House says both sides agree on USD 1.5trl in cuts to spending and that additional USD 200bln can be agreed upon soon. Meanwhile, Republicans rejected a tax deal at the latest White House talks according to Democrat officials. (RTRS/Sources)
Also, Mary Miller, assistant secretary for financial markets has been privately fielding questions for foreign investors about the debt limit fight in Washington and has been reassuring them that the US will not default. Miller has been explaining to foreign investors the political dynamics in Washington and had been insisting that Congress will raise the debt ceiling in time. It is unknown what the investors’ reaction has been to her reassurances. (RTRS)
Elsewhere, the Fed’s balance sheet rose USD 2.862tln in the week ended July 13th from USD 2.853tln in the week ended July 6th. Foreign central banks’ overall holdings of US marketable securities at the Fed fell USD 8.02bln in the week ended July 13th to stand at USD 3.445tln. (RTRS)
EU and UK Headlines:
Prime Minister George Papandreou told his ministers that they have to be properly briefed on the meaning and implications of a selective default, which is likely to come about as a result of the involvement of the private sector in the country’s second bailout. (Kathimerini)
- Eurozone Trade Balance SA (EUR) (May) M/M -0.6bln vs. Exp. -3.2bln (Prev. -2.9bln, Rev. to -2.5bln) (RTRS)