U.S. Markets Find Some Strength on EM Interest Rate Rises, Fitch Cuts Greece

U.S. markets are happy, somehow, that emerging markets tightening to combat the effects of U.S. Fed imposed money inflows and consequent inflation will improve the appeal of domestic stock markets, and maintain the current momentum to higher levels. It is, to say the least, a very strange point of view. We wonder if it wasnt the Fed`s promise to pump money into the bond market that lifted the equity markets out of their depressive mood, and fuelled the global rally that has been going on since September. Up until Mr. Bernanke`s clarification that he would do whatever it takes to float the economy, a recession was being anticipated. The strong performance of emerging markets, the appreciation of their currencies, and the improvement in their consumption trends that ensued, was clearly the major if not the main driver of the turnaround. And now, we`re elated that emerging market demand will contract in consequence of rate rises? Where is the sense in that, and on what kind of basis do people generate such analyses?

On no basis, naturally, since markets are driven by impulses, not commonsense. Not that commonsense would have benefited us any way, since, even that doesn`t seem to be enough to help us in the face all the strange contradictions that are popping up around the world. But as human beings, we tend to believe that being reasonable is an advantage.

A very interesting piece of news came from the North African Nation of Tunisia this year where the President in power for the past 23 years, Zine ElAbidine ben Ali has quit his office, and and finally was forced to  flee the country after massive protests proved to be too much for his regime. Dismayed by high unemployment and a very corrupt administration, Tunisians have ousted their dictator from power. It is a good sign for the world at large that another dictator has been forced to say farewell to his palaces, police, and powers, but from a more general vantage point, it is not really that clear that the recent events will prove to be constructive for the trends that the optimists expect. The loss of economic stability has damaged social accord and political harmony in many nations around the world, and as the global society transitions from its present state of disequilibrium to a new mode of existence, events of strong impact must be anticipated.

In Europe, Fitch has cut Greece`s long-term debt rating to BB+, which is a junk level , and maintained the negative outlook in place for the country. Moody’s lowered its ranking for  Greece to Ba1 on June 14 and S&P rated the country at BB+ from BBB+ on April 27. The Euro wasn`t impacted by the news, and is in fact somewhat higher on the day. Since stock markets around the world have been performing reasonably well, it seems that the currency has been supported by the general optimistic mood, apart from anything specific.

U.S. Markets Find Some Strength on EM Interest Rate Rises, Fitch Cuts Greece

U.S. markets are happy, somehow, that emerging markets tightening to combat the effects of U.S. Fed imposed money inflows and consequent inflation will improve the appeal of domestic stock markets, and maintain the current momentum to higher levels. It is, to say the least, a very strange point of view. We wonder if it wasnt the Fed`s promise to pump money into the bond market that lifted the equity markets out of their depressive mood, and fuelled the global rally that has been going on since September. Up until Mr. Bernanke`s clarification that he would do whatever it takes to float the economy, a recession was being anticipated. The strong performance of emerging markets, the appreciation of their currencies, and the improvement in their consumption trends that ensued, was clearly the major if not the main driver of the turnaround. And now, we`re elated that emerging market demand will contract in consequence of rate rises? Where is the sense in that, and on what kind of basis do people generate such analyses?

On no basis, naturally, since markets are driven by impulses, not commonsense. Not that commonsense would have benefited us any way, since, even that doesn`t seem to be enough to help us in the face all the strange contradictions that are popping up around the world. But as human beings, we tend to believe that being reasonable is an advantage.

A very interesting piece of news came from the North African Nation of Tunisia this year where the President in power for the past 23 years, Zine ElAbidine ben Ali has quit his office, and and finally was forced to  flee the country after massive protests proved to be too much for his regime. Dismayed by high unemployment and a very corrupt administration, Tunisians have ousted their dictator from power. It is a good sign for the world at large that another dictator has been forced to say farewell to his palaces, police, and powers, but from a more general vantage point, it is not really that clear that the recent events will prove to be constructive for the trends that the optimists expect. The loss of economic stability has damaged social accord and political harmony in many nations around the world, and as the global society transitions from its present state of disequilibrium to a new mode of existence, events of strong impact must be anticipated.

In Europe, Fitch has cut Greece`s long-term debt rating to BB+, which is a junk level , and maintained the negative outlook in place for the country. Moody’s lowered its ranking for  Greece to Ba1 on June 14 and S&P rated the country at BB+ from BBB+ on April 27. The Euro wasn`t impacted by the news, and is in fact somewhat higher on the day. Since stock markets around the world have been performing reasonably well, it seems that the currency has been supported by the general optimistic mood, apart from anything specific.

Fitch Cuts Irish Credit Rating to BBB+

The main theme of today is the ratings downgrade of Ireland, but markets still performed reasonably well on the day, with Asian and European boursesup, while U.S. markets demonstrate a lack of momentum. The main spots of weakness were India and China, with market mood dampened in the latter by concerns about rising interest rates, and in the former by the recent bout of corruption scandals that have shaken the government of PM Manmohan Singh. Against this background, the EURUSD barely moved, while the USD was little changed against its major peers. The USDJPY pair is  testing its 100-day MA, with little followup so far. Among commodities, after failling to make much downward progress during this week, gold started the day in the red, but seems likely to end it in the black.

Fitch downgrades Ireland`s credit rating to BBB+

Today Fitch cut Ireland`s sovereign credit rating by three notches to BBB+, to two levels above speculative grade, in a move that was widely anticipated by the markets. We think that BBB+ is too high for the country, given the uncertainties that surround its financial independence, but Fitch is still the most realistic among the three major credit rating agencies.

The CDS market is reported to be pricing in losses of about 20% for senior holders of Irish debt due for the next 3-5 years, and Fitch`s move has not had a perceptible impact on the bond or CDS markets, as it does not go much beyond the certification of the obvious. Still, West European sovereign CDS generally ended the day with a higher yield today.

3-month Euribor was unchanged today at 1.029%. USD Libors show little movement. In other Eurozone news, German HICP inflation has continued to trend higher, with the latest number coming at 1.5% y-y vs. the previous 1.3%. It is unlikely that the Eurozone inflation will become a serious problem next year, but if the trend continues, as it is possible it will do with the Euro depreciating, the ECB will find it even harder to engage in further easing while maintaining any remaining degree of credibility.

BoK leaves interest rates unchanged

The Bank of Korea is reported to have left interest rates unchanged after moving to increase them last month in response to rising inflation. Nonetheless, the pressure to keep the won weak is strong, and the bank is not likely to change the current stance for some time to come. Korea`s recovery has not been very robust, and low rates make sense from more than one angle.

In the rest of Asia, we have yet more evidence that Asians are committed to reining in speculative inflows in a decision by China`s SAFE to the effect that the interbank FX market will close at 4:30 pm (8:30 GMT) from next Monday, revising the existing regulations that ends operations at 5:30 pm. In a similar move, they are reported to have advised HK not to drop the peg, since, we think, that would accelerate the fall of the USD and greatly complicate their management of the yuan.The Chinese are obviously unnerved by the massive amount of speculative cash flooding the country, and hope to be able to limit the impact on the domestic market through cosmetic measures such as this latest announcement, but as long as appreciation expectations remain, there is very little that they can do to reverse the trend, especially because there are few alternatives in today`s world against the safe bets provided by the USDCNY pair.

We conclude by noting the announcement by Goldman Sachs today that it is revising downward its previous EURUSD forecasts for the next year, in  acknowledgement that they have been over-optimistic in assessing the performance of the Eurozone, and the troubles of the periphery.  The bank is still bullish, however, with a 6-month target of 1.45 vs. previous 1.50, and a 12-month target of 1.50 vs. a previous 1.55.