S P Warns Europe
06-12-2011
While the EUR/USD kept to a rather cautious range in early trading on Monday and equity markets performed mostly to the upside it turned out to be the evening that delivered another dose of cold water on investors. The S&P ratings agency issued a stark warning to the entire Euro zone that the entire region could be downgraded if they do not get their financial house in order sooner rather than later. Adding to the rather negative mood to the global outlook was the Reserve Bank of Australia early this morning which cut their key interest rate further as they underscored worldwide risks as a factor. The EUR, GBP, and AUD promptly began to trade to towards the weaker sides of their range upon this combination of news and while Wall Street did turn in gains on Monday, investors in the States will only get their first chance to react to the warning from the S&P today.
A good question nowadays regarding downgrades from rating agencies is who pays attention, this after the failure of the rating agencies to warn investors properly in 2008 regarding the financial earthquake that struck. However the ratings agencies do have an immediate impact on many institutional investment houses which are mandated to cover their exposure to their assets according to ratings – particularly when regarding Sovereign Debt. If the S&P were to carry forth and downgrade the entire European Union it would be yet another body blow to an already wobbling marketplace.
It appears in early trading that traders will get an opportunity to test the ranges of the EUR, GBP, and AUD collectively against the USD as stability is sought. The ongoing meetings between Germany and France have been highlighted and are supposed to culminate late this week with a hoped for agreement on new measures – but there are no concrete promises. Interestingly it would appear that the boost to confidence that the German and French summit had hoped to provide had the wind taken out of its sails with the surprise statement by the S&P. Gold has traded lower on the renewed strength of the USD and as of this morning is around 1714.00 per ounce.
Data from the U.S. yesterday proved disappointing as the ISM Non-Manufacturing PMI reading missed it estimate and Factory Orders proved negative. The U.K. will see the Halifax HPI today and Germany will release Factory Orders results. Also lingering on the horizon are the scheduled meetings and monetary policy statements from the ECB and BoE which will come on Thursday.
The broad markets had a rather positive day of trading on Monday, but that looks as if it will change today based on sentiment which is likely to react nervously to the S&P warning. Forex has been rather consolidated in many respects the past few days, but volatility could seep into the major currency pairs today if ranges are perceived to be under pressure. The question now is how Europe will react to last night’s dose of cold water being thrown in its direction. Can the E.U. show a unified front and prove that they actually can create a fiscal union or will acrimony continue to be heard as political wrangling continues?
