Investors Bracing for Increasingly Likely U.S. Credit Downgrade

July 26, 2011

Many people, discouraged by the political comments Monday night of Obama and Boehner, now believe the U.S. AAA credit rating will be cut even if a post-August 2 default is averted. 

Gold hit a record high of $1624.30 but is unchanged on balance at $1613.80 per ounce. Oil prices firmed 0.5% to $99.70 per barrel.

Across the board weakness in the U.S. currency, which fell 1.1% against the kiwi, 0.9% relative to the Australian dollar, 0.7% versus the euro and sterling, 0.5% against the Swiss franc, 0.4% vis-a-vis the loonie, 0.3% against the yen and 0.1% versus the yuan.

Share prices are mixed in the Pacific Rim, with gains of 1.3% in Hong Kong and Taiwan, 0.9% in South Korea, 1.1% in Indonesia and 0.5% in Singapore and Japan but losses of 1.9% in India, 0.5% in Thailand, and 0.3% in the Philippines, Pakistan, and New Zealand.  The Paris Cac has lost 0.6%, while the German Dax and British Ftse are only 0.1% softer.

Ten-year sovereign bond yields rose one basis point in Great Britain, held steady in Japan and dipped two basis points in Germany.

In the euro area, contagion fears related to Italy and Spain have resurfaced.

The Reserve Bank of India hiked key interest rates by 50 basis points, not 25 bps as analysts were expecting.  Such was the third consecutive tightening, the fifth rate hike of 2011, and the eleventh overall since March 2010.

British GDP firmed 0.2% on quarter in 2Q and 0.7% on year.  Such matched analyst forecasts but was a better result than market players were fearing.  A 6.6% plunge in mining led to a 1.4% drop in overall production.  That drag was mitigated by increases of 0.5% in both services and construction.  April activity was impacted by a number of special factors like the Royal Wedding, an extra holiday, Japan’s supply chain disruptions, hot temperatures, and the start of Olympic ticket sales. 

Britain’s monthly services index, which had dived 1.2% in April, recovered 1.6% in May and was 1.4% higher than a year earlier.

Japanese corporate service prices rose 0.3% in June and posted a reduced 12-month decrease of 0.7% after falling by 0.9% in the year to May and 1.3% in 2010.

Industrial production in Singapore increased 1.6% on month and 10.5% on year in June.

Australia’s indices of leading and coincident economic indicators both slipped by 0.1% in May.

New Zealand’s trade surplus narrowed more sharply than forecast to NZD 230 million in June from NZD 551 million in May.  Exports and imports were each 4.7% greater than a year earlier.

French consumer confidence improved three points to a reading of 86 in July and surpassed expectations.

German consumer confidence scored a 5.4 in in August, down a tenth from the previous month and lower than a reading of 5.6 that was predicted.

The Swiss consumption indicators fell by 0.40 to 1.48 in June, adding to mounting evidence that Europe’s economy has lost momentum.

Swedish producer prices ticked up only 0.1% in June and posted a larger on-year 0.2% drop than had been anticipated.

Retail sales in Hungary increased 0.5% on month and 0.7% on year in May.  The result was better than expected.  Polish retail sales, in contrast, advanced by less than assumed, gaining 1.4% on month in June and 10.1% on year.  Polish unemployment eased to 11.8% from 12.2% in May.  The Finnish jobless rate in June stood at 8.4%, which was lower than in May.

Hungary’s central bank is expected to leave its key interest rate steady after today’s meeting.

South Africa’s index of leading economic indicators fell 1.6% in May.

Scheduled U.S. data include weekly chain store sales and monthly readings on the Case Shiller house price index, new home sales, consumer confidence, and the Richmond Fed factory index.  Kansas City Fed President Tom Hoenig, one of the FOMC’s most hawkish members, speaks publicly today.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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