Soft Risk On Italy's Downgrade

China's GDP slowed more than expected to 7.6% yoy in Q2. That's the worst number in three years and below Q1's 8.1% yoy. Nonetheless, it's somewhat a relief to markets as the figure was just a touch below expectation of 7.7% and above China's 2012 target of 7.5%. Based on the data, the soft-landing scenario is still on track and more monetary and fiscal stimulus is likely to be provided to ensure the growth target is met. Other data from China saw industrial production rose less-than-expected by 9.5% yoy in June, retail sales rose more than expected by 13.7% yoy and fixed-asset investment rose more than expected by 20.4%. The dollar and yen are mildly lower as risk markets recover following China's data. But that could be due to position adjustment ahead of the weekend. Current development doesn't warrant a change in trend and we'll likely see more upside in the greenback and yen ahead. But it's so far uncertain which one will be stronger.

Euro remains broadly pressured after Moody's downgraded Italy's government debt ratings by two notches to Baa2, down from A3. And that's just two notches above junk level. The rating agency noted that "Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets." Also, the "risk of a Greek exit" has risen and "Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized". Overall, Italy is "more likely to experience a further sharp increase in its funding costs or the loss of market access". Italy is set to auction EUR 3.5b - 5/25b in debt today, including bonds due in 2019, 2022 and 2023 and a new three-year bond.

Regarding the status of Greece, the IMF said yesterday that "some targets were met, a number were missed". The Troika is expected to return to Greece on July 24 to commence discussions on "how to bring the program fully back on track". The Greek government said it started to work on a plan for additional EUR 11.5b savings and finalize the measures by July 23. The measures will be crucial to convince EU/IMF/ECB to release the next tranche of EUR 31 bailout funding. Also, Greece is aiming at convincing the EU and IMF to extend the reform targets by two years till the end of 2016. On the other hand, EU/IMF said that Ireland had met the fiscal targets for the first half of 2012 and "further extending Ireland's record of consistently achieving program targets". Ireland is "on track" to bring budget deficit to within 8.6% of GDP this year.