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By Gaurav Kashyap, Head of DGCX Desk, Alpari ME DMCC
It was a tale of two halves in trading this past week - originally risk sentiments were propped up by several successful European bond auctions (albeit worsening economic data) but S&P's historic nine nation downgrade on Friday saw risky assets reverse all the gains of the week to close the week on a negative note.
Eurozone markets face ever-increased pressure following downgrades
Rating's agency S&P on Friday downgraded nine Eurozone nations, headlined by stripping France & Austria of their revered AAA rating to a new rating of AA+. Italy, Spain, Portugal and Cyprus were all downgraded by two notches with Portugal and Cyprus now finding themselves in junk status. Slovakia, Malta and Slovenia were all downgraded by one notch, while Germany maintained its AAA rating.
With markets largely posturing for such an announcement, France was the latest nation to lose its AAA status, following the US downgrade from a few months earlier. And although France still held its AAA rating with Moody's and Fitch, the latest action will see an even larger pressure dragging down European credit markets with the potential of further downgrades in the future, "there is a one-in-three chance that we could lower the rating further in 2012 or 2013."
Following the announcement, the Euro reversed most of its gains against the US Dollar to slide more than 200 points on the day to close at a sixteen month low at 1.2671. Earlier in the week, the Euro found good buying support to breach the 1.28 levels against the Greenback following a rather successful bond auction in Spain.
End of week bond sales achieve low yields pre-downgrade
On Thursday Spain auctioned EUR9.98bn worth of 3-4 year bonds, doubling the target of EUR5bn up for sale. The yields on these notes dipped to 3.384%, down from the 5.187% yield seen in December for a similar sale. Italy's auction on Friday was received well, with a bid-to-cover ratio of 1.22 (down from 1.36 at a similar sale in December) and a yield of 4.83%, down from a yield of 5.62% from the auction which took place at the end December. The warm reception to the latest debt raising exercises from two of the most troubled European nations was short-lived as S&P's downgrades on Friday swiftly put the markets on the back foot.
Despite the debt raising exercises and historic downgrades, we had more than enough event risk with a jam-packed economic docket. Monday saw the first meeting of 2012 between Merkel and Sarkozy who pledge to implement a new "compact fiscal" agreement that was agreed at the December 9th summit. Markets got a boost following comments with higher yielding assets particularly moving higher against the Greenback - this despite a weakening industrial production reading from Germany (YoY 3.6% act v 3.9% exp / 4.2% prev and MoM -0.6% act v -0.5% exp / 0.8% prev) which foreshadowed a weaker industrial reading for the Euro-zone as a whole (YoY -0.3% act v 0.2% exp / 1.0% prev and MoM -0.1% act v -0.3% exp / -0.3% prev).
The economic docket was concluded with the rate decision from the European Central Bank who held rates unchanged at 1.00% as largely expected. The Bank of England also held rates unchanged at 0.50% as expected.
Friday's news will surely weigh down risk sentiments in the week ahead. The latest commitment of traders report released on Tuesday showed that the net shorts for the Euro increased to a record above 155,000 and the downgrades will certainly see the shorts pile up into trading next week ahead. The Euro finds itself at a key level against the US Dollar between 1.2570-1.2685 and would need to hold at these levels before opening up the door to sub 1.24 levels. Along with consumer price data from the Eurozone and the US, the main driver for Euro pricing will be drive by Thursday's French and Spanish bond auctions.
Staff
