S&P Downgrades Spain
Late during the US session, S&P downgraded Spain by two notches from A to BBB+, outlook negative. The agency warned that the country’s ‘budget trajectory will likely deteriorate’ and more national support may be needed for the banking sector. The euro traded through session lows on the back of the release though in general the marginal impact of such releases seems to have diminished throughout the course of the debt crisis. At present the market’s focus appears off the Eurozone’s structural issues but rapid political shifts could yet trigger a shift in the underlying fiscal/growth dynamics in the Eurozone – the question remains which aspect the sovereign bond market will favour more, consolidation of finances or organic growth. At present, it seems to be the former and S&P’s warnings will not soothe nerves, especially if the view that the LTROs provided by the ECB only provide temporary respite. As such, risk may open on a soft touch during the Asia session on Friday, though it’s conceivable that the BoJ will provide a floor for sentiment. The market is currently looking for an outright APP expansion, but conflicting stories throughout trading on Thursday suggest the result is not a done deal, especially for USDJPY positions clinging on to the hope that the BoJ can deliver where the Fed held fire. The market’s response to the FOMC decision was clearly one of caution, but there was still very little material to express conviction views. The consensus view for the BoJ decision is one of further easing, but at this stage risk: reward seems skewed towards disappointment. The BoJ itself may feel aggrieved that the Fed is shifting the burden of accommodation onto the BoJ and Shirakawa’s views on the matter are well known. Also out on Friday, Japanese CPI, the Swiss KOF leading indicator for April, while retail sales figures are out throughout Scandinavia. Jordan and Carney of the SNB and BoC are on the wires, and the US Advance Q1 GDP release is due. EURUSD traded 1.3180-1.3255, and USDJPY 80.66-81.03.
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UBS Investment Bank