Danske Daily: 14 February 2012

Moody’s put the UK on negative credit rating outlook late last night in a move which also saw downgrades for six other European countries.

The Bank of Japan announced new easing policies this morning.

US equities trended higher  yesterday,  taking their cue from the successful vote in Greece on Sunday.

Markets Overnight

Moody’s put the UK on negative credit rating outlook late last night due to the lack of measures to reduce the debt load.  The rating agency also downgraded Italy, Malta, Portugal, Slovenia and Slovakia by one notch and maintained the countries’ negative outlook, while Spain was downgraded a hefty two notches. Each of these six countries were also downgraded by S&P last month, and hence last night’s rating action was no major surprise. However, Moody’s has become the first rating agency since the eurozone debt crisis erupted to warn that UK’s credit rating is at risk. According to our economists, the UK’s AAA rating is not justified by economic fundamentals  – for details see  UK Research: How long can the UK maintain its AAA rating? dated 7 September 2011.

The Bank of Japan (BoJ)  announced new easing policies this morning and moved closer to an explicit price target, thereby taking financial markets by surprise. The assetpurchase programme was expanded by JPY10trn to JPY65trn, including a credit loan facility, and a price stability goal of 1% was set. The move follows the release of bleak Q4 GDP data yesterday, showing that the economy contracted 2.3% (ann.).

In the absence of major market movers during the US trading session, financial markets took their cue from Sunday’s Greek approval of the austerity steps demanded for a second bail-out package for the debt-ridden country (see further details in  Flash Comment  -Greece votes package through dated 13 February 2012). Hence,  US equities trended higher, the S&P500 index rising 0.7% led by industrial and financial shares, though nine of the index’ 10 sectors posted gains yesterday. In Asian trading, stocks fell in a knee-jerk reaction following the downgrades by rating agency Moody’s, though sentiment later recovered.

US Treasuries traded with a cautious tone yesterday, ending the day slightly weaker following the successful vote in Greece over the weekend. Eurozone peripheral bond spreads tightened further yesterday, while data published by the ECB showed that the bank sharply pulled back on its SMP purchases last week.

The FX market saw USD/JPY trading higher following the decision  by the BoJ to ease monetary policy further, and the pair is currently trading at levels just shy of 78. EUR/USD has declined below 1.32 on the back of the  credit rating downgrades, while sterling is also under pressure this morning.

Global Daily

Focus today: We expect US retail sales to surprise to the upside with a 0.9% increase in January as we saw substantial gains in both chain store and car sales, indicating that underlying demand is picking up. UK inflation will most likely show that prices fell 0.3% in January and the annual pace dropped below 4%. Inflation is declining rapidly and is set to hit BoE's 2% target later this year. The market reaction will most likely be muted. We expect euro area industrial production to have dropped 1.7% m/m in December in line with the poor German December figures. The German ZEW expectations index for February, which is highly correlated with market sentiment, is expected to increase slightly. The fourteenth EU-China summit will be held in Beijing today. On the agenda is
expected to be possible financial support from China. We think that the Chinese line will continue to be that any financial assistance from China will have to be through IMF.

Fixed income markets: If US data today support the broadening of the recovery, it will support risk sentiment. Besides the data releases, there will be some interesting auctions in Italy today. Italy will auction up to EUR 4bn of the three-year benchmark (6% Nov14) and an estimated EUR 1-2bn in 3% Nov15 and 4% Feb17. Italy has performed lately, especially lifted by strong domestic demand. Given the positive risk sentiment, we expect the auctions to go well.

FX markets: While there  are also several economic data releases on the agenda,  this morning market participants are likely to scrutinize last night’s actions by rating agency Moody’s. No doubt, the decision to put UK’s credit rating on negative outlook caught markets by surprise, with no previous indications from the other agencies that the country’s debt rating may be in danger. Hence, today could see GBP weaken further, also against EUR. In the afternoon, sentiment may get a boost from US retail sales data which should help lift the euro and pro-cyclical currencies in general.