S&P Downgrades Spain
S&P cut Spain’s rating by two notches from BBB+ to BBB- with a negative outlook. 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 as the reasons for its decision. S&P further noted that the hesitation of the government to request for a bailout increases the downside risks to Spain’s rating. EURUSD sold off following the news but considering that the downgrade also increases the probability that Spain would request for a EU bailout sooner than later, triggering the OMT programme activation, should potentially limit the downside. We see the Moody’s decision, due this month, as a greater risk structurally as this would put Spain’s rating into junk category. We can expect the Spanish bond markets, which gained slightly on Wednesday, to open low ahead today reflecting the S&P’s decision. Earlier on Wednesday, Spanish Prime Minister Rajoy’s meeting with French President Hollande was largely uneventful. Both the leaders shared the view that a Greek exit would mean a “collective failure” of the Eurozone. Hollande noted that a decision on further aid to Greece should be made at the EU summit on October 18. The impact on EUR was fairly muted. USD fell slightly during New York hours after the Fed released its beige book where it noted that the employment conditions were little changed since the last report. The current report is based on the data collected from August 21 to September 28. The lack of material improvement in employment, as noted by the Fed, despite the September household survey showing a drop in unemployment rate to 7.8%, highlights the risks of further Fed easing in December. Minneapolis Fed President Kocherlakota reiterated his September remarks noting that the fed funds rate should remain “extraordinarily low” until the unemployment rate drops to 5.5%, with an inflation threshold at 2.25%. AUD gained for a third consecutive day on Wednesday with AUDNZD gaining by about 50 pips during New York hours. With Australian corporate tax payments due on October 22, gains in AUD could be due to mining companies buying AUDUSD to pay their tax bills. Ahead today, the Australian employment report for September is due. Our economists expect a 5k growth in employment, in line with consensus, but note that the unemployment rate could increase slightly to 5.2% (consensus: 5.3%). Also on tap today are the September BoJ minutes, CPI data in Germany and the G-7 Finance Ministers meeting in Tokyo.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank