First Market Reaction to S&P Downgrades of Europe

January 16, 2012

Trading has been calmer than feared.  For one thing, U.S. markets will be closed today for the Martin Luther King holiday, and for another, S&P did not downgrade European country risk ratings as much as some feared.  The hope is that European leaders will place even greater urgency now on nailing down the details of a rescue plan by their summit at the end of this month. 

Moody’s did not immediately follow S&P’s cue but rather is continuing to assess its AAA rating on France.

The dollar is narrowly mixed with no further net change against the euro.  The greenback is 0.3% softer against the yen and loonie but has risen 0.3% verus the kiwi, yuan and Swiss franc and by 0.1% relative to sterling and the Australian dollar.

Whereas share prices dropped in the Pacific Rim, European bourses are comparatively steady.  Equities fell 2.0% in China, 1.4% in Japan, 1.3% in Singapore, 1.2% in Australia, 1.1% in Taiwan, 1.0% in Hong Kong, 0.9% in South Korea, 0.8% in Thailand, and 0.7% in Indonesia, the German Dax is up 0.5%, and the Paris Cac and British Ftse have eased just 0.2% and 0.1%, respectively.

Ten-year sovereign debt yields are unchanged in Germany, Great Britain and Japan.  Usage of the ECB deposit facility hit yet another daily record high.

Oil and gold prices climbed 0.8% and 0.9% to $99.44 per barrel and $1645.80 per ounce.

After U.S. markets closed Friday, Standard and Poor’s downgraded its ratings on nine countries that use the euro.

  • The French and Austrian ratings was reduced a notch to AA+.
  • Italy’s rating was cut two notches to BBB+.
  • Spain’s rating was also cut by two notches to A.
  • Portugal’s rating was cut two notches to the junk status of BB.
  • Slovakia’s rating was downgraded a single notch to A.
  • Malta’s rating was downgraded one notch to A-.
  • Slovenia’s rating was cut a notch to A+.
  • The rating for Cyprus was downgraded a notch to BB+.
  • Seven other countries retained their old ratings:  AAA in the cases of Germany, The Netherlands, Finland and Luxembourg, AA for Belgium, AA- for Estonia and BBB+ for Ireland. 
  • An outlook of "negative" was attached to 14 of the above 16 economies, the exceptions being "stable" designations for Germany and Slovakia.  Negative outlooks imply a 1 in 3 chance of a downgrade in the medium future.

Three Japanese indicators were released this Monday, plus the Bank of Japan’s branch managers’ survey, akin to the Fed’s Beige Book, was published.

  • The best news was a 14.8% snapback in core domestic machinery orders in November.  These had fallen 6.9% in October.  In October-November, the level of core domestic orders was 2.4% below the 3Q level, suggesting a shallower drop last quarter than the 3.8% decline assumed by officials.  Domestic core machinery orders are a leading indicator of future private business spending.  Foreign machinery orders leaped 20.3% in November.  Domestic core and foreign machinery orders were respectively 12.5% and 8.0% greater than in November 2010.
  • Consumer confidence advanced 0.6 points to to a two-month high of 38.1 in December.  The reading has been lower than 40 since the Sendai earthquake in March 2010.  Readings of 40.1 last January and 40.6 in February were followed by 38.3 in March and a 2011 low of 33.4 in April.
  • Domestic corporate goods prices edged up 0.1% in December and by an as-expected 1.3% on year.  Such climbed 2.0% in 2011 as a whole due to elevated energy costs after dipping 0.1% in 2010.  Export prices fell 4.3% in the year to December, while import prices advanced by 6.0%.
  • The BOJ’s assessment on seven of nine geographical regions was downgraded in the latest quarterly survey.

A gauge of Australian inflation expectations was subdued last month, suggesting an in-target 2.4% rise of consumer prices in the coming 12 months.  The target range is 2-3%.  Many analysts think a third central bank rate cut will be announced February 7.  By custom, policymakers meet 11 times per year, skipping only January.  Australian job ads fell 0.9% in December and posted their first on-year decline (2.6%) in 22 months.  Loans in November to households (up 1.4%) and for investors (1.8%) were stronger than forecast.

German wholesale prices were unchanged in December, cutting their 12-month increase to 3.0% from 4.9% in November and an average advance in 2011 of 7.5%.

There were other signs of receding price pressure in Europe.  Denmark’s PPI rate fell to 4.1% last month from 5.2% in November.  The Czech PPI went up 0.1% on month in December and slowed to a 12-month pace of 4.6% from 5.6%.  The Swiss PPI/import price index was 2.3% lower last month than in December 2010.

Britain’s Rightmove house price index recorded its third drop in a row, a decline of 0.8% this month.  The index was just 0.4% higher than in January 2011, down from a 1.5% on-year increase in December. 

Signs of lower inflation were not limited to Europe.  In India, the WPI posted an on-year increase of 7.47% last month, down from 9.11% in November.  New Zealand food prices posted a second straight 0.2% monthly rise in December and was 2.9% higher than a year earlier.

Turkish consumer confidence did not improve as much as predicted in December, climbing a point to a reading of 92.

The Fitch credit rating agency, which earlier has suggested that its BBB rating for Russia might get upgraded, reassigned the "outlook" for that country risk rating to stable from positive.

Norway posted a NOK 41.1 billion trade surplus last month, best in three years.  Exports advanced 12.5% in 2011 versus import growth of 9.3%.

Canadian motor vehicle sales get reported later today.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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