- S&P pull the rug from positive signals from Greece/troika phone conference:
Headlines out of Greece following Monday’s phone conference with troika officials, suggesting that the two sides were close to an agreement that would unlock the next tranche of assistance from the EU/IMF, brought EURUSD back up through 1.3700 from an intra-day low of 1.3586. The rally was undone in a flash 90 minutes after the NY close when S&P made an unexpected announcement it was downgrading Italy’s sovereign rating by one notch to A and keeping them on watch for further negative ratings action. S&P cited weaker growth prospects for Italy and the fragile economic coalition/policy differences within parliament that limits the government’s ability to respond decisively. The agency also doubts that the planned EUR60bn of recently agreed savings will come to full fruition.
- But avoiding Greek default scenario can still go a long way to stemming systemic risks:
S&P’s actions play to the view of the many euro naysayers who argue that actions that avoid a Greek default scenario does little to resolve the broader crisis of confidence in the Eurozone. Yet the impact of ratings changes in the Eurozone has tended to be ephemeral. We still regard the existing degree of systemic risk emanating from Greece and evident not just in the rest of the Euro-periphery but in markets as far flung as Korea and India, as such that success in eliminating risk of an early Greek default will go some way to cushioning risk sentiment. In this respect if today’s follow-up conference call between Greece and the troika allows Greece to make an announcement on Wednesday of agreement to the measures demanded of it so as to unlock the next tranche of aid (as suggested by a Greek official involved in the talks) that may go some way to securing a more durable improvement in sentiment.
- FOMC begins; Riksbank’s minutes due; ZEW and US housing starts top data calendar:
Euro-peripheral concerns aside, President Obama’s $3.6bn 10-year deficit reduction plans unveiled Monday afternoon failed to resonate. With nearly 50% of savings expected to be generated from additional taxes on the wealthy, eliminating many tax deductions on higher income earners (and too tax breaks for energy companies) this drew immediate scepticism of having much hope of forming the substance of a bipartisan deal. The FOMC meanwhile commences its two day meeting and will probably devote significant discussion to the Europe situation. in itself plays to the Fed keeping powder dry when the meeting concludes on Wednesday, at least beyond the widely expected ‘Operation Twist’ The Fed will need to hold out the hope of further actions if risk appetite is to stand much chance of improving out of the FOMC but which will also needs to be allied with better news out of the Eurozone. For today, event risks to note are the Riksbank minutes where a more dovish tone now looks to be discounted in SEK; German ZEW readings (seen much weaker); and US housing starts (also seen weak) .
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BNP Paribas
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