Muted Reaction to Large Downgrade of Irish Credit Rating

December 17, 2010

Moody’s credit rating service knocked down Ireland’s rating by five notches to Baa1, just three steps above investment grade, and left the outlook at “negative,” thus signaling the possibility of an additional downgrade. 

The dollar nevertheless fell 0.5% against the euro and 0.4% relative to the Swiss franc.  The move reflects 1) a further improvement in the German business climate according to the IFO Institute index, 2) lower U.S. bond yields, and 3) investors becoming more accustomed to bad Euroland debt news and thus less sensitive to such headlines.

The summit of EU leaders has produced talk of support but no concrete action to handle debt difficulties in a more nimble way.  Bini Smaghi of the ECB has a column in the FT warning that fear of a debt default could jeopardize the region’s financial system.

The dollar has risen 0.3% against the Australian currencies, 0.2% versus sterling and 0.1% against the Canadian dollar but also eased 0.1% against the yen and yuan in addition to the aforementioned drops against the euro and Swissy.

In the Pacific Rim, stocks rose 2.0% in Hong Kong, 1.1% in India, 1.0% in Pakistan and New Zealand, 0.4% in Taiwan and the Philippines, and 0.2% in Singapore and Malaysia.  Losses occurred of 0.7% in Thailand, 0.4% in Australia, 0.2% in China and 0.1% in Japan.  In Europe, the British Ftse so far shows a dip of 0.3%, and both the German Dax and Paris Cac have slipped by 0.1%.

Ten-year sovereign debt yields fell by eight basis points in Japan and Britain and by four bps in Germany.

Oil and gold prices firmed 0.1% and 0.2% to $87.77 per barrel and $1373.60 per ounce.

The U.S. tax cut stimulus bill was approved by a bipartisan vote of 227-148 in the House of Representatives.  The Senate earlier passed such by 81-19.  President Obama is expected to sign the legislation expeditiously.

North Korea engaged in further saber-rattling against South Korea.  The market didn’t react.

The IFO industrial business climate index for Germany improved by more than forecast to 109.9 in December from 109.3 in November, 106.8 in September, 101.9 in June, 98.3 in March and 94.5 a year earlier.  The components for current conditions and expectations each advanced by 0.6 points to 112.9 and 106.3, respectively.  In mid-2010, those components had readings of 101.3 and 102.5.  Retailers and wholesalers led the improvement in the latest month, while the indices for manufacturers and construction weakened somewhat.

IFO’s service sector climate index rose to 24.9 from 23.4 in November.  The current situation went up a point, and expectations improved by two points.

Construction output in the euro area was unchanged in October and 6.8% lower than a year earlier.  Construction fell 5.4% between June and October.  Over the past twelve months, construction rose 5.8% in Germany but fell by 9.3%, 6.7%, and 2.0% in Portugal, the Netherlands, and France.

Euroland recorded a EUR 7.7 billion seasonally adjusted trade deficit in October, which was smaller than any of the five previous monthly deficits, each of which exceeded EUR 10 billion and collectively averaged EUR 13.5 billion.  In the four months between June and October, however, exports rose just 0.7%, while imports sagged 4.6%. 

French business sentiment improved more sharply than expected in December, printing at a 2.5-year high of 103 after 100 in November.

Italian industrial orders were unchanged in October because of a 1.2% drop in domestic demand that month.  Industrial sales rose 1.0%. Italy’s current account deficit narrowed to EUR 2.6 billion in October from EUR 8.1 billion the month before.   Finnish producer prices showed no change on month in November but were 6.6% higher than a year earlier. 

British consumer confidence, according to the Nationwide measure, fell to a 20-month low of 45 in November from 52 in October and a high score this year of 80 in February.  British households face a major dose of fiscal austerity just around the corner.

The KOF Institute projects weaker Swiss growth next year than in 2010, agreeing with the view of the Swiss Central Bank.

Brazilian unemployment sank to a record low of 5.7% last month from 6.1% in October.  Brazil has been experiencing a robust recovery.

Colombia’s central bank is meeting today.  The U.S. index of leading economic indicators will be released today and should show a significant rise.

Copyright 2010 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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