- Late last Friday, S&P downgraded long-term sovereign rating of the US to AA+ from AAA, and assigned a negative outlook
- The ECB said that it will actively implement its SMP bond buying programme, which was followed by market talk of the central bank buying in the Italian and Spanish government debt
- German government spokesman said he is not aware of any signals that the Italian/Spanish bonds bought by the ECB will be transferred to the EFSF at a later date, adding that the Franco-German statement does not go beyond what was agreed at the EU Summit on July 21st
- Support was seen in Bunds following market talk of asset re-allocation from equities into bonds
Late last Friday, S&P downgraded long-term sovereign rating of the US to AA+ from AAA, and assigned a negative outlook, which weighed on WTI and Brent crude futures and in turn led commodity-linked currencies to trade lower. In early European trade, some appetite for riskier assets emerged after the ECB said that it will actively implement its SMP bond buying programme. The news was followed by market talk of the central bank buying in the Italian and Spanish government debt, which was also noted by traders. This resulted in European equities to come off their earlier lows, led by financials, and witnessed aggressive tightening in the Italian/German and Spanish/German 10-year government bond yield spreads. However, as the session progressed, Bunds regained strength partly on the back of market talk of asset re-allocation from equities into bonds, which weighed upon equities and dented risk-appetite. Comments from a German finance ministry spokesman highlighting Germany’s reluctance to further enhance the size of the EFSF also weighed upon sentiment.
Moving into the North American open, the economic calendar remains thin, however markets will keep a close eye on any new developments in the Eurozone, together with any potential downgrade of US financial institutions by S&P following their rating action on the country. In fixed income, there is another Fed’s Outright TIPS Purchase operation in the maturity range of Apr’13-Feb’41, with a purchase target of USD 0.25-0.50bln.
China is likely to increase benchmark interest rates again in the near term to curb inflation, according to the latest comments by analysts. The possibility of more interest rate hikes in the third quarter cannot be ruled out said chief economist Li of Guotai Junan Securities. Li said the reserve requirement ratio is already at a record high of 21.5% and has limited room for further rises. (Xinhua)
In other news, according to S&P a new global financial crisis would hit Asia harder than the last one, especially nations heavily exposed to offshore markets or still repairing budgets from the 2008-2009 crisis. (RTRS)
According to a statement by the G-7, the group will take every action to stabilise markets, adding that tension faced by Italy, Spain does not reflect fundamentals, and welcomes decisive action taken in the US and Europe. It further said that the G-7 will co-operate closely on currency market actions and it will commit to secure liquidity in the market. (Sources)
S&P lowered long-term rating of the US to AA+ from AAA, and assigned a negative outlook. S&P said that the US fiscal consolidation plan falls short, and observations on political process drove cut. Furthermore, S&P’s Chambers said there is one in three chance of a further US credit rating downgrade over the next six months to two years. However, the US Treasury said that S&P’s judgement is flawed, and gives very misleading picture. It added that S&P has dramatically overstated deficits, and there is no justifiable rationale for a downgrade. (Sources/RTRS)
Meanwhile, Moody’s said it expects the US economic recovery to continue and expects additional US budget deficit reduction initiatives in place by 2013. Also, Fitch expects to finish US sovereign rating review by the end of August. Fitch said the review will focus on sovereign credit fundamentals relative to AAA-rated peers and medium-term economic and fiscal prospects in light of the August 2nd debt ceiling agreement. (Sources)
In other news, former Fed Chairman Greenspan said that he does not see a double dip recession; however the economy is slowing down. He added that government bonds are very safe, and predicts that markets will take a while to bottom out. (Sources)
Elsewhere, US Treasury Secretary Geithner will remain at his post at President Obama’s request, according to the Obama administration. (RTRS)
EU and UK Headlines:
The ECB said in a statement that it will “actively implement” its SMP bond buying programme and welcomed announcements by Italy and Spain on new measures and reforms in areas of fiscal and structural policies. ECB added it considers decisive and swift implementation of these measures by both governments as essential. ECB said it is fundamental that governments stand ready to activate the EFSF on the secondary market, on basis of ECB’s analysis, once the EFSF is operational. (RTRS)
In other news, Germany's government thinks Italy is too big for Europe's rescue fund to save, and the government doubts whether even tripling the EFSF would enable it to save Italy because the country's financing needs are so enormous. (Der Spiegel)
• Eurozone Sentix Investor Confidence (Aug) M/M -13.5 vs. Exp. 3.4 (Prev. 5.3) (RTRS)
• German 6-month Bubill auction for EUR 3.872bln, bid/cover 2.00 vs. Prev. 2.80 (yield 0.695% vs. Prev. 1.193%) (RTRS)
In early European trade, some appetite for riskier assets emerged after the ECB said that it will actively implement its SMP bond buying programme. The news was followed by market talk of the central bank buying in the Italian and Spanish government debt, which was also noted by traders. However, as the session progressed, equities came under pressure partly on the back of market talk of asset re-allocation from equities into bonds, together with comments from a German finance ministry spokesman highlighting Germany’s reluctance to further enhance the size of the EFSF. Moving into the North American open, equities are trading mixed with technology and basic materials as the worst performing sectors.
EUR received support in early trade after the ECB said it will “actively implement” its SMP bond buying programme, together with market talk of the ECB buying in the Italian and Spanish government bonds. However, as the session progressed, the currency came off its earlier highs partly after comments from a German finance ministry spokesman highlighting Germany’s reluctance to further enhance the size of the EFSF. In other news, weakness in commodities weighed upon commodity linked currencies such as CAD, AUD and NZD.
Elsewhere, according to Moody’s, Japans’ efforts to stem the JPY’s gains against the USD last week have been partially reversed, a development that is credit negative for the nation’s recovery. In other news, Japan’s Finance minister Noda said that market’s trust in USD and US Treasuries has not wavered in the wake of a US credit downgrade. (Sources/RTRS)
WTI and Brent crude futures traded under pressure on the back of S&P downgrading the US sovereign credit rating, prompting a move away from riskier asset classes.
Oil & Gas News:
• According to a report by BoFA, they expect to see Brent crude oil prices briefly breaking below USD 80 per barrel in a mild recession. BoFA say they see Brent crude oil prices averaging USD 106 a barrel in H2 of 2011. BoFA maintained its average Brent forecast of USD 114 a barrel for next year, despite the growing downside risks, with WTI crude averaging USD 90 a barrel in H2 of 2011
• China’s domestic fuel prices are not primed for a price cut yet, but if global prices keep falling and reach a trigger point of 4%, then China will lower pump prices in a timely manner according to Xinhua news agency.
• Libya oil output is now 30,000 BPD, according to a Libyan oil source. In other news Libya suffered gasoline shortage due to NATO blockade, according to the Oil Head.
• Indian refiners have paid about USD 1.43bln in a new mechanism towards clearing Iran’s oil payment backlog according to sources. Iran is confirming MRPL’s August crude deliveries on a cargo by cargo basis.
• North Korea urged South Korea and the US to cancel their upcoming annual joint exercise if they want to see a thaw in relations as well as denuclearisation.
• Syrian forces attacked a central town and stormed parts of an eastern city, killing at least four people in fresh fighting as President Bashar Assad's government struggled to crush a five-month-old uprising, activists said. In other related news, The Gulf Co-operation Council has demanded an immediate end to violence and bloodshed in Syria and asked President Bashar Assad to introduce serious and necessary reforms that would protect the rights and dignity of the people.
• Libyan rebels control the town of Bir Al-Ghanam south of Tripoli, with no sign of government forces according to reports.
• Goldman Sachs raised its Gold price forecast to USD 1645 per ounce, USD 1730 per ounce, and USD 1860 per ounce on a 3-, 6-, and 12-month horizon respectively, on the back of a decline in real rates in the US together with a rise in debt concerns.