Spain Downgrade Damage Done
At the end of the US session, S&P downgraded Spain’s sovereign rating by two notches to BBB-. EURUSD was slow to react, but eventually fell 30 pips. The ratings agency cited deepening economic recession and rising unemployment which are limiting the government’s policy options and adding to the frictions between the central and regional governments. S&P further noted that the hesitation of the government to request a bailout increases the downside risks to Spain’s rating, which remains on outlook negative. We think the announcement has hurt the euro as much as it is going to though, given: (1) no important levels in the ratings table were crossed and (2) the downgrade arguably marginally raises the likelihood that Spain will request a rescue sooner rather than later, which would fulfill one of the necessary conditions for the ECB to begin bond buying. Besides, we see the Moody’s ratings review, due to complete this month, as a greater risk to the euro, as a possible downgrade would put Spain’s rating into junk territory. The Fed’s beige book noted that employment conditions were little changed since the last report. The lack of material improvement (despite the September household survey showing a drop in unemployment rate to 7.8%) highlights the risks of further Fed easing in December. Today, German CPI data is due and we have a G-7 Finance Ministers meeting in Tokyo. Chinese lending data may also be released – if not today then at some point over the coming days.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank