Fitch now expects to conclude its review of the US sovereign rating by the end of November(22-Nov-2011)

Risk sentiment is lower however, conviction remains light and FX trading fickle. We suspect that risk are skewed to the downside and continue to fade risk rallies. As was widely expected, the media outlets are reporting that the US “super committee” has failed to reach an agreement on $1.2tn in new spending cuts. The formal announcement is expected in the US session today. The news that the bi-partisan committee on deficit reduction was a failure has further eroded the markets confidence that policy makers, on either side of the Atlantic, have the ability to address mounting deficit problems. Asian regional indices were slightly lower, with the Nikkei down -0.40% and Hang Seng –0.20%. FX reaction was muted, with the EURUSD bouncing between 1.3469 and 1.3541, while USDJPY lingered around 77.00 handle. The USDJPY did provide some temporary excitement as a rogue spike to 77.35 had markets chattering of official intervention. Although then the smoke cleared there were no signs that the MoF or the BoJ had been involved. The lack of agreement in the US will now trigger across the board spending cuts which will kick in during 2013. The initial reactions were that Moody and S&P rating agencies would hold off to monitor developments before making a decision on further trigging rating actions, however, Fitch has stated they are currently reviewing the situation. Fitch’s US rating remains above the lower range and as stated in August, if the Super Committee failed to reach an agreement this would have a negative effect on ratings. Fitch now expects to conclude its review of the US sovereign rating by the end of November. No last minute deal is expected, while President Obama has promised to veto any attempt to change the sequestration, which means that one way or another the spending cuts are coming. Although the market reaction was limited, it is clearly refocused on the debate over the US massive deficit and will most likely come to a head in 2012.

All the excitement in the US, briefly took the market’s eyes off of Europe sovereign debt yields spread, which continued to gently widening. Election of a new conservative government in Spain over the weekend failed to provide a sustained optimism, Spanish bonds remained weak, with the 10yr yield trading higher by 16bp. S&P issues a statement saying that Spain’s rating was unaffected by the results of the election, however it’s unclear if that comment should be viewed as a positive of negative. Moody’s fired another shot across Europe’s bow, with a warning about France saying the raised borrowing costs would be a credit negative. Eurogroup Chairman Juncker stated that if France were to lose its AAA rating then so would the EFSF. However, giving the auction price, the markets already consider it lower than a triple-A. On a final note, the ECB stated it purchased and settled €7.99bn worth of bonds last week, significantly higher than the €4.48 reported last time. Clearly the ECB, through its SMP, has been actively however, unfortunately for the central banks there has been not real effect on reversing the rise in yields. Interestingly, Bank of Italy’s Saccomanni stated that the ECBs participation in the secondary markets had no spread target. Clearly, the ECB will have to spend a lot more in order to combat the markets Euro bearishness.

By
M.Zohaib Gadit
Forex Trading Consultant