Tuesday 13th December 2011
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CURRENCY: Last week’s EU summit may well have represented the summit of optimism on Europe. From here expect a very tough road given the patience of markets appears to be running thin and contagion risks lifting.
RATES: Very quiet trading overnight in London. We expect to local yields to open a touch lower this morning given overseas moves.
CURRENCY: A collapse of the NZD overnight was largely driven by a falling AUD which found itself at the mercy of commodity and equity prices dropping. There was only one way to go from the summit.
GLOBAL MARKETS: Equities were under heavy selling pressure following comments from Moody’s and S&P. US equities were down around 2% at the time of writing after the Euro Stoxx 50 had retreated 3.1%, with the FTSE100 down 1.8%. Government bond yields in the US, Germany and UK fell, but 10-year yields rose in France, Italy (to 6.5%), Spain (5.71%) and most of the heavily indebted Eurozone periphery, with Greek 10-year yields approaching 30%. CDS spreads widened, particularly in Italy, France and peripheral Eurozone economies. The CRB commodity price index fell 1.1%, with precious metals down 3.2%. Oil prices fell 1.7%.
KEY THEMES AND VIEWS
RATING AGENCIES WARN OF DOWNGRADES. Following the Europhoria immediately following the European Summit, a key question was if the summit did enough to stave off credit downgrades? Apparently not, according to overnight comments by the ratings agencies. Financial market reaction has been swift, as investors have come to the conclusion that credit downgrades were easily justifiable and probably inevitable given the arithmetic of trying to service extremely high levels of government debt when funding costs are going up.
Moody’s said it could downgrade the sovereign ratings of some European Union countries in the coming months, with the crisis remaining at a “critical and volatile stage”. Fitch chimed in, noting that the summit did little to ease the pressure off Eurozone sovereign debt, and that a “comprehensive solution” has not yet been offered. S&P is expected to announce the results of its review later this week, but last week warned it could lower the credit ratings of Germany and France and cut other countries’ credit scores as a possible recession settles over the continent and a crisis of confidence in Europe’s political management puts pressure on its banks.
The repercussions could be severe. Any downgrade in the credit rating of Europe’s governments will add to debt service costs and would make it more difficult for banks in those countries to get credit from other banks, causing a possible pullback in lending to consumers and businesses at a time when economic growth is already being squeezed. Already, the cost of insuring against default on European government debt is approaching levels last seen in February 2009. Not what is needed at this juncture.
OTHER EVENTS AND QUOTES:
• Bundesbank President Jens Weidmann: While a European accord to limit budget deficits represents “progress,” the onus is on governments rather than the ECB to resolve the crisis with financial backing.
The fortunes of others weighed on the NZD overnight and are likely to do so today. Having explored the downside and not recovered, will limit the ability of the NZD throughout the remainder of this week. Topside selling interests have lowered their expectations and should ensure that a move above 0.77USD does not occur today.
Expected range: 0.7595 – 0.7695
NZDAUD: Tea break…
A weakening bias for this cross continues. Expect little ability to move into the 0.76AUD zone today with a possible probe towards support levels.
Expected range: 0.7550 – 0.7600
NZDEUR: Only way down…
Once you reach a summit you cannot go any higher. Markets may have passed the zenith of possible optimism on Europe and may now expect them to be entering a downward spiral. Given market positioning the move lower for the EUR should be cushioned by profit taking and thus moves on this cross may be subdued.
Expected range: 0.5750 – 0.5800
NZDJPY: Bowled over…
Buyers have now been satisfied on this cross but support levels should come under further scrutiny. Expect a move towards the 58JPY level today.
Expected range: 59.00 – 60.00
Great change is coming for Europe which may not include the GBP. At this point it is seen as a favourable factor for the GBP but when broad recovery comes this may change. The problem is recovery for Europe is years away.
Expected range: 0.4870 – 0.4910
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