- Friday evenin:g Moody's became the first rating agency to strip the UK of its AAA rating.
- The first day of the Italian elections took place with unpublished opinion polls suggesting that Bersani is likely to win with a small margin.
- Chinese HSBC manufacturing PMI showed a disappointing decline to 50.4
Late Friday Moody’s downgraded the domestic and foreign currency government bond ratings of the United Kingdom by one notch from AAA (negative outlook) to Aa1 (stable outlook). Reasons for the downgrade are a poor growth outlook, the increasing challenges to the government’s fiscal consolidation (debt/GDP ratio is projected to peak in 2016 at 96%) and deterioration in the shock-absorbing capacity of the government’s balance sheet. The downgrade will influence the political debate about austerity and is embarrassing for the UK Chancellor of the Exchequer George Osborne who had promised to safeguard the UK’s credit rating. However, it is unlikely to have much impact on the UK’s sovereign bond yields although it did hurt the pound, which fell to a two-year low on Friday.
The first day of the Italian elections took place in an atmosphere of uncertainty as rumours of unpublished opinion polls suggest that Berlusconi as well as Grillo’s Five Star Movement have gained votes, while Monti has lost votes since the last opinion polls were published on February 8. According to these unpublished polls and recent political analysis, the most likely outcome is that Bersani, with support from Monti will be able to form a broad centre-left government with a small majority in the Senate. But an outcome where nobody is able to form a majority government remains a real risk.
Japanese media suggests that Prime Minister Shinzo Abe intends to nominate Asian Development Bank chief Haruhiko Kuroda as the next Bank of Japan governor.
Chinese HSBC flash manufacturing PMI was worse than expected with a decline to 50.4 from 52.3 in January, the lowest level in four months. The new export orders index fell to 49.8 from 50.5.
US equity markets gained Friday with S&P 500 up 0.88%, Dow Jones up 0.86% and Nasdaq up 0.97%. This morning the Nikkei index is up as much as 1.9% on the news about Kuroda while Hang Seng is trading almost flat.
US bond yields fell slightly at the long end of the curve on Friday with 10-year yields closing at 1.962.
In the FX markets the British pound fell and the EUR/GBP rose briefly above 0.8750 after Moody’s downgrade on Friday evening. This morning, it is again trading around 1.147 after briefly touching 1.14.0. The USD/JPY pair is trading around 94.1 after temporarily trading above 94.7 early in the session. EUR/USD is trading almost flat this morning at around 1.319.
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