MOODY´S DOWNGRADES BELGIUM / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

Global Market Overview

Last updated: December 16, 2011 10:03 pm

Moody’s downgrades Belgium

By FT Reporters

Friday 21.50 GMT. The euro has erased its slim gains on the day after a downgrade of Belgium’s credit rating and amid wariness over the damage from the eurozone fiscal crisis on global growth.



Moody’s Investor Services lowered Belgium’s sovereign credit rating by two notches, from Aa1 to Aa3, citing the uncertainty over its political future and the risks that a shrinking national balance sheet would pose to its banking system. The outlook remains negative.

 

In light after-hours trading, the euro gave up already meagre gains to trade below $1.3030, leaving it unchanged on the day. S&P 500 futures were pointing to an opening next week 0.1 per cent below the Friday close.


Earlier, Fitch Ratings had placed a number of eurozone countries on rating watch negative, the list including Belgium, Spain, Slovenia, Italy, Ireland and Cyprus. Fitch added that the euro area country ceiling of triple A was unaffected and affirmed France’s triple A rating, but revised the outlook to “negative”.


Though market reaction was muted, US bank shares came off their high levels on the news, and two-year swap spreads, a key measure of bank counterparty risk, jumped 5 per cent higher to 49 basis points. That is their biggest one-day rise in three weeks.
The euro clung to gains until the Moody’s action, but trading was conspicuous, coming as short interest on the single currency rose to an all-time high – any gains could be dismissed as covering that position.


Bearish futures bets against the euro versus the dollar hit a record $19bn this week, according to US Commodity Futures Trading Commission figures, while bullish bets on the dollar index were near an all-time high at $17bn.


“The development is not surprising considering the fall in confidence as sovereign credit downgrade fears loom amid concerns over funding needs in 2012,” said Camilla Sutton and Eric Theoret, strategists at Scotia Capital.


Most risk assets rallied as investors took heart from better than expected US economic data. The FTSE All-World equity index rose 0.2 per cent, as industrial and energy commodities were stronger. Gold rose 1.8 per cent to $1,597 an ounce.


Wall Street’s S&P 500 largely erased an early rise of 1.3 per cent and was up just 0.2 per cent. Europe was unable to follow Asia higher, however, with the Stoxx 600 down 0.4 per cent.


Other gauges of risk appetite point to a lack of bullish conviction. US benchmark bond yields are down 6bp to 1.85 per cent. The dollar index, which tends to display a fairly tight negative correlation to broader market optimism, is 0.1 per cent weaker.


Stresses in eurozone bond markets also eased somewhat, with Italian 10-year yields lower by 1bp at 6.51 per cent, according to Bloomberg data.


Bulls looking for an end-of-year bounce will be welcoming the market’s ability to embrace improving US economic data rather than succumb again to chronic eurozone debt fears.


Hopes for a recovery in the world’s largest economy increased after Thursday’s data showed US initial jobless claims unexpectedly fell to a three-year low and Federal Reserve gauges of manufacturing in New York and Philadelphia topped estimates.


Nevertheless, credit worries lurk. Christine Lagarde, the International Monetary Fund’s managing director, has warned of a 1930s-style threat to the global economy and urged international help in resolving the debt problems.


In addition, rating agency Fitch has downgraded seven global banks, warning of “increased challenges” in financial markets.
Earlier, in Asian trading, the FTSE Asia Pacific index rose 0.8 per cent. The region’s economic outlook appeared to improve after Singapore’s exports exceeded economists’ forecasts and Indonesia regained an investment-grade rating for its sovereign debt at Fitch after 14 years.

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Trading Post.

It doesn’t matter how much sentiment towards an asset may have deteriorated, there is always the chance of a short-term bounce as selling is temporarily exhausted, writes Jamie Chisholm.

And if that asset is being used as a gauge of general risk appetite, its rejuvenation may have implications for the broader market.
Traders should bear this in mind when they note technical issues relating to gold and the euro, arguably the two assets most encapsulating the recent stock market wobble.


The euro’s relative strength index (against the dollar) on Wednesday broke below the 30 mark that signals “oversold” conditions.
The last time the euro did this, at the start of October, it was followed by a 10 cent rally over four weeks.


The RSI of gold almost touched 27 on Wednesday at the height of selling that saw the bullion at one point extend its losses for the week to nearly $150 an ounce.
Sure enough, at the time of writing, both gold and the euro have stabilised, with buyers nibbling.


That may embolden risk asset bulls. But traders remain tense. Friday’s “quadruple witching” of futures and options expiry threatened more volatility in thinning markets.

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Reporting by Jamie Chisholm in London, Song Jung-a in Seoul and Telis Demos and Michael Mackenzie in New York

Copyright The Financial Times Limited 2011.