Euro-sentiment gyrations continue, US fiscal haggling continues
S&P put 15 Euro nations’ credit ratings on negative CreditWatch, including all six triple-As. S&P is worried about the “deepening political, financial and monetary problems with the European economic and monetary union”. Aren’t we all! The biggest difference between sovereign and corporate ratings has always been that for a company, what drives it to default is an inability to get hold of money to pay back its debts (or interest). Countries are different, because they have sovereignty over their currency which means that default can come either in the form of not paying back debt, or of accepting devaluation and/or inflation. And Euro zone economies are different, because no single one has sovereignty over its currency, a fact of which we have all been reminded in recent weeks. This should have been reflected in ratings years ago. On that basis, the overnight move by S&P yet again represents the agency catching up with a reality markets recognised ages ago.
The impact of the move though, comes from its timing – just when M Sarkozy and Frau Merkel were trying to conjure up yet another rabbit from their hat to save the euro. The positive mood created by comments over the weekend and yesterday has been replaced by renewed gloom, It will be interesting to see how much that affects, say, Italian government bond prices. Negatively, for sure, but if the market is capable of concluding that this is just a case of a backward-looking rating agency seeing what we already knew, a ‘blip’ will be all that is felt.
The Australian market had backed off slightly on hopes of a rate cut in the last few days, so when the ‘as expected’ move did occur, the currency reacted. There were no major changes to the policy statement, though confidence levels in the growth outlook have deteriorated and fears about the effects of global financing as a result of events in Europe, have increased. At 4.25%, the Australian cash rate has further to fall. The currency is overvalued, but its gyrations have left us trying to sell it higher up – and therefore short of smart ideas as to how to trade it here.
The other main central bank meeting today is in Canada, where rates are likely to be left on hold at 1%. In Europe we get Swiss CPI (-0.4 y/y), German factory orders and after soft UK BRC sales data overnight, Halifax house prices. The US has no major data due but all eyes are on talks to extend payroll tax cuts, which were described overnight in the press as ‘floundering’.
EUR/USD is going sideways, really. There seems little point trying to navigate the random events moving it. CEE FX remains vulnerable, for all the same reasons as before. The US payroll tax cut extension talks are critical but if they can avoid being stupid, riskier currencies will do alright and we will look to buy CAD/JPY on this correction. We remain short EUR/GBP.
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Societe Generale
Research & Analytics