Euro Drops As Moody’s Puts Spain On Review For Downgrade


The dollar made ground against most major currencies through the Asian session. Moody’s announced early in the London morning that Spain’s debt rating was on review for downgrade, which saw the euro drop and take a few of the currencies with it against the greenback. EUR/USD dropped 50 points to $1.33 while AUD/USD declined from A$0.9950s to hover above the figure. The dollar had made some progress before that after the FOMC decision and statement caused no surprises and after US retail sales surprised on the upside. In Asia, Japan’s Tankan showed the first decline since Q1 2009, Australian consumer confidence rebounded from a five-month low, and South Korean unemployment dropped to the lowest level in six months. EM currencies declined against the greenback with the KRW leading the way despite the strong jobless figures.

Asian stocks declined, taking the MSCI Asia Pacific down 0.7% after yesterday it hit its highest intraday level for 2 ½ years. Country benchmarks were mixed in the region however – declines were seen in Tokyo, Shanghai, Singapore and Mumbai, but gains were seen in Seoul and Taipei. European and US index futures were trading firmly lower.

Treasuries gained ahead of the inflation report in the US later today, and after the Moody’s announcement on Spain increased credit concerns in Europe. The US benchmark 10-year yield fell 4 basis points to 3.43%, and the 30-year was down 4bps to 4.49%. German bonds opened slightly lower, with 10-year bund yields up 1bp to 3.03%, while Spanish yields added 2bps to 5.46%.

Currency Markets

Moody’s put Spain’s Aa1 debt rating on review for a potential downgrade, citing concerns with government funding and finances and the overall debt level. The euro took a knock, with EUR/USD dropping back 50 pips to $1.33. The rating agency particularly noted the cost of recapitalizing the banking sector and limited control over regional finances hampers the ability of the government to achieve ‘required sustainable and structural improvement in general government finances.’ Still, the statement pointed out that Moody’s views Spain as ‘a much stronger credit than other stressed euro zone countries’ and said the rating would likely remain in the Aa range. As it is our ratings model has Spain at A+/A1/A+, so this doesn’t come as a major surprise.

The last FOMC meeting of the year produced a statement that reads very much like the October statement. It did recognize that the economic data has improved in recent weeks. Indeed aside from the payrolls number for November US figures are showing a clear improvement in the economy after the soft Q2, with most releases surprising on the upside (a trend continued with yesterday’s retail sales number). Still, the Fed highlighted that this has not been sufficient to lower the unemployment rate. Contrary to some speculation prior to the meeting, it did not change its $600 bln Treasury purchase figure. Overall, there is little new or very interesting in the Fed’s statement. The market reaction was similarly muted. The dollar initially was sold but quickly bounced back. Bonds remain pinned near session lows and the equity markets were firm. There is one important event left this year and that is the EU Summit later this week. US retail sales beat expectations, rising 0.8% in November from a year earlier. October’s sales were also revised significantly higher, up 1.7%.

Japan’s Tankan survey showed confidence among large manufacturers dropped in Q4 for the first time since the first quarter last year. The Bank of Japan said the index of confidence fell to a reading of 5 from 8, although the result was better than the forecasted decline to 3. The component measuring manufacturers expectations showed sentiment is expected to drop to -2 in March. The report adds to concerns that the Japanese economy is flirting with contraction in the fourth quarter, with poor data on unemployment, exports and industrial production for October. Still, the pessimistic outlook was mainly down to a deterioration in confidence in industries that are commodity-dependent (petroleum and non-ferrous metals) – and a further spike in commodity prices isn’t a done deal, so that part of the manufacturing sector may do better than the current outlook. China’s inflation concerns have spread to its consumers, according to a central bank survey. A price satisfaction index fell to 13.8 for Q4, the lowest reading since Q4 1999. Data last weekend showed that consumer price index up 5.1% in November from a year ago – significantly above the PBOC’s 3% target.

Australian consumer confidence picked up in December from the lowest level in five months. The Westpac and Melbourne Institute sentiment index increased 0.2 percent to 111.0 this month. The release comes on the heels of mixed reports in recent weeks – November employment increased by the most since January, though in Q34 the economy only grew 0.2%. The Reserve Bank Governor Glenn Stevens noted that consumers were more reluctant to spend and borrow when leaving rates on hold earlier this month. South Korean unemployment dropped much more than expected in November to the lowest level in six months, reigniting speculation about the timing of another rate hike from the central bank early next year. The jobless rate fell to 3.2% from 3.6% in October, though some economists put the drop down to temporary hiring for a census. The Bank of Korea left its benchmark rate at 2.5% last week. Philippine unemployment ticked higher in October, rising to 7.1% from 6.9% in September. Singapore retail sales disappointed in October. Sales excluding cars rose 5.3% from a year earlier, up from 5.2% growth in September. That was worse than the 6.3% gain expected but was the 12th straight gain.

Upcoming Economic Releases

Europe: Eurozone unemployment, UK jobless numbers, CBI reported sales, Spain CPI, Italy trade balance, Turkey unemployment, Hungary industrial production, Czech PPI. Americas: US inflation, TIC flows, industrial production, Empire manufacturing, Canada manufacturing sales. Events: Norges Bank, Riksbank interest rate announcements.

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