S&P put the US rating on negative watch “owing to the dynamics of the political debate on the debt ceiling’. The agency said there is “at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days”. At Fed Chairman Bernanke’s second day of testimony he floated contingency plans around the debt ceiling issue, such as the Fed itself buying up defaulted securities, though he added that any such decision would need to be taken by the FOMC as a whole and he expressed doubts over its efficacy on preventing prohibitive gains in yields. Meanwhile, the White House reported that $1.5 trn in cuts were agreed upon and an additional $200 bn could be found, though we believe these figures are insufficient to avoid another vote next year. Continue reading →

The dollar was dealt a double blow over the past 12 hours. Moody’s put the US sovereign rating on review for a possible downgrade, citing a lack of progress in negotiations on raising the debt ceiling. The dollar sold off in response, and losses were especially pronounced against the JPY and CHF. Earlier, Fed Chairman Bernanke’s testimony to Congress set a relatively dovish tone and comments suggesting that the option for further stimulus remains open stoked fears of another round of QE. Bernanke’s speech largely repeated themes from his June 22 comments but the Fed is clearly keeping an open stance on policy until a significant trend in data emerges. The euro shook off uncertainty over the timing of a potential emergency meeting in the Eurozone and a Fitch downgrade of Greece. EURUSD traded 1.4131-1.4282. USDJPY traded 78.47-79.61. Continue reading →

Risk appetite held steady during the Asia session, helped in part by stronger than expected Chinese economic data. EURUSD traded 1.3951-1.4054 and USDJPY traded 78.50-79.58. Continue reading →

The euro continued to sell off during the Asia session as Monday’s meeting of Eurozone finance ministers failed to produce any concrete proposals to address the latest bout of market nervousness. EURUSD traded 1.3932-1.4062 and USDJPY 80.06-80.38. Continue reading →

Attention shifts to payrolls today as the market seeks to end the week consolidating the gains made in risk. A robust ADP payrolls report has boosted hopes of a good number today (UBSe +135k, cons. 100k) and sentiment is invariably better on the economy compared to just over a weak ago, when soft regional PMI prints out of the US prompted fears that the soft patch was entrenching. Consensus expectations for the headline payrolls number has risen by around 20k since, though even with a good print the Fed will remain underwhelmed. In other news, yesterday the euro caught a bid after the ECB unexpectedly tweaked its collateral rules to favour Portuguese sovereign bonds. Continue reading →

The ECB decision today will be the main focus as investors assess whether the central bank can maintain a relatively hawkish stance in light of growing data and event risk. Despite heavy volatility in European credit markets, sentiment finally stabilised during the US session once the market had fully digested yesterday’s news of Portugal’s ratings downgrade. Surveying the damage since the announcement we see that the euro fell 200 pips, Portuguese 10y yields widened about 180 bp, and other European sovereigns such as Ireland, Spain, and Italy also came under some pressure. Continue reading →

The euro managed to stage a minor recovery overnight as markets digested the Moody’s downgrade of Portugal, which jolted an otherwise sleepy US session. The four-notch move, with hints of more to go, served as a reminder that even though Greece has passed its near-term tests, problems within other economies persist, not to mention contagion risk. As the ECB meets and growth momentum starts to wobble, the sustainability of current plans will be further scrutinised. Continue reading →

Overnight, the RBA left rates on hold at 4.75% but our economists note that the media release signalled less certainty on growth, both domestic and globally. As a more cautious tone was largely priced in, the AUD was not hit hard, nor was risk in general as there were bright spots elsewhere, but we note that increased uncertainty within policymaking is denting risk:reward generally. Yesterday, the July 4 Independence Day holiday closed US equity and Treasury markets, and ensured an exceptionally quiet session in FX. Ahead today, our European economists expect the Riksbank to deliver another 25bp of tightening. This week’s ECB press conference and Friday’s payrolls report are likely to be the main events. On the data side, German PMI services and composite Eurozone PMIs will be released. It’s a quite session in the US as factory orders are the only release of note due. EURUSD traded 1.4466-1.4553 and USDJPY 80.71-81.11. Continue reading →

Eurozone finance ministers held a conference call on Saturday at which they authorised the release of Europe’s share of Greece’s next quarterly instalment. The IMF is due to decide on its own contribution later this week, perhaps on Friday. The weekend news was very much expected after the Greek parliament voted in favour of additional austerity measures last week – indeed the euro and risk assets in general have rallied recently in anticipation of this outcome. Continue reading →

Data out of Asia was broadly soft overnight, giving risk trades a mild knock though equities are faring well. Safety plays have started the European session relatively robust as growth fears remain in place. In addition to a soft Japanese Tankan, Chinese PMI also came in softer than expected at 50.9, the lowest since Q1 2009. Continue reading →

Asian equities and risk assets are trading higher as an improved risk environment continues from yesterday. EURUSD broke above the 1.45 mark, building on its gains following yesterday’s Greek austerity vote, while the dollar was soft across the board. The news wires were quiet and markets continue to trade on wider risk appetite. EURUSD traded 1.4519-1.4416, USDJPY 80.93-80.31. Continue reading →