S&P Lobs Bombshell into European Debt Talks

December 6, 2011

Standard and Poor’s placed Germany, France, Italy, Luxembourg, Belgium, Ireland, Portugal, Spain, Slovakia, Slovenia, Malta, Finland, The Netherlands, Austria, and Estonia on negative watch for a possible credit rating downgrade within 90 days.  Among participating EMU members, only Greece and Cyprus, the former already sitting at rock bottom and the other reviewed recently, were exempt from wearing this scarlet letter.  Some countries could be downgraded by one notch from triple A status.  Others might lose two notches.  The action jeopardized the foundation of the EFSF rescue fund as well.  With this loaded gun at their heads, European leaders are unlikely to ever solve this problem if they cannot now get it done this week.  Until week’s end, however, the possibility of a near-term break-up of the euro has risen

Overnight currency movements have been modest, nonethesless.  The dollar is unchanged against the euro and loonie, up 0.1% versus the yuan, kiwi, and sterling, off 0.1% against the yen, and 0.4% higher relative to the Swiss franc and Australian dollar.

Pacific Rim markets were the first to react to the news.  Equities fell by 2.0% in Taiwan, 1.4% in Japan and Australia, 1.2% in Hong Kong, 1.0% in South Korea and 0.6% in Singapore and Malaysia.  In Europe, the German Dax has lost 0.7%, and the Paris Cac is down 0.3%.  The British Ftse is up 0.1%.

Bond yields are higher among EMU members.  German bunds rose three basis points.  But British gilts slid by three basis points.

Oil prices are steady at $100.95 per barrel, while gold fell 0.7% to $1723.10 per ounce.

In other news, the Reserve Bank of Australia implemented a 25-basis point cut in the Official Cash Rate for the second month in a row to 4.25%, its lowest level since April 2010.  Analysts had been split on whether officials would make such a move so soon.  The Bank of Canada also announces its latest rate decision today, that being scheduled for 09:00 EST (14:00 GMT).

The second estimate of euro area national income accounts were unrevised.  GDP grew 0.2% last quarter and 1.4% from a year earlier.  Personal consumption accounted for all of the entire quarterly expansion.  Government spending and private business investment had no effect on the GDP growth rate.  Net exports enhanced GDP by 0.2 percentage points of growth, but that was offset by the impact of inventories.  Compared to 3Q10, GDP advanced 2.8% in Austria, 2.7% in Finland, and 2.6% in Germany but just 1.6% in France, 1.1% in The Netherlands, and 0.8% in Spain.  GDP sank 1.7% on year in Portugal and a whopping 5.2% in Greece.

German industrial orders rebounded 5.2% in October from a 4.6% plunge in September and were 1.5% higher than the 3Q average level.  Analysts were expecting orders, which also showed on-year growth of 5.4%, to recover just 1.0%.  The main improvement was in foreign orders for capital goods, which soared 12.2% in October after a 5.7% decline in September.  Domestic capital goods orders, a leading measure of business investment, rose only 0.9% and were still 2.4% below the 3Q mean.

The German construction-sector purchasing managers index rebounded 2.6 points in November to 49.9, essentially signaling unchanged activity, after dropping from 50.5 in September to a reading of 47.3 in October.  J.P. Morgan’s composite PMI score for the world economy rose to 52.0 in November from 51.3 in October.

U.K. data were disappointing. British same-store retail sales according to the retail consortium (BRC) fell 1.6% in the year to November, three times more than anticipated.  Total sales posted a 0.7% on-year gain, half as much as in October.  The Halifax house price index fell 0.9% on month in November, the worst result in three months, and by 1.0% on year.

Swiss consumer prices had a deflationary flavor in November, dropping 0.2% on month and by 0.5% on year.  The news weighed on the franc because such elevates the possibility that Swiss National Bank officials may ratchet the currency down to a range no better than 1.2500 per euro.

Filipino CPI inflation eased to 4.8% in November from 5.2% over the year to October.  The PPI rose just 0.5% on year.

South Korean GDP grew 0.8% last quarter according to revised figures.  GDP was 3.5% stronger than a year earlier.  Investment spending contracted 0.8% on the quarter.

Australia’s current account deficit narrowed to AUD 5.637 billion in the third quarter from AUD 6.66 billion in 2Q due to an AUD 583 million rise in the goods and services trade surplus.

Norwegian consumer confidence dropped sharply in the fourth quarter of 2011 to a reading of 9.7 from a downwardly revised 18.6 in 3Q.  Romanian GDP was 4.4% greater than a year earlier in 3Q.  Czech retail sales rose 1.0% on month and 1.5% on year in October.

Scheduled North American data today include Canada’s IVEY PMI index and building permits and the U.S. IBD/TIPP optimism index and weekly chain store sales.  Tarullo of the Fed speaks, and the Bank of Canada releases its interest rate decision.  U.S. Treasury Secretary Geithner is in Europe to see if he can persuade European leaders to avert a world catastrophe.

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

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