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S&P downgrades Italy 1 notch to A
Kiron Sarkar
September 20, 2011

Hi there,

There are further reports of monetary tightening in China. Property prices continue to rise. There are yet more reports from bankers relating to (rising) capital flight from China. Not a good sign;

The Chinese Commerce Ministry reports that Beijing is disappointed that the EU has not recognised China as a "market economy". There are reports that the Bank of China has withdrawn some FX swap lines with French banks in a fit of peek. Legislation relating to allegations of currency manipulation, which will get cross party support, is going to be put to Congress. President Obama will veto, no doubt;

Minutes released by the Australian Central Bank, the RBA contained no real surprises. The bank is concerned about the global economy and local inflation;

Discussions between the Troika and the Greeks are fraught apparently. It seems as if any decision will take yet more time. A further telephone conversation is to take place at 5.00pm GMT today. The Greek Finance Minister is promising everything as usual - its not promises mate, you have to do it;

S&P has downgraded Italy 1 notch from A+ to A, with a negative outlook, suggesting further possible downgrades. S&P is now 3 notches below Moody's, which suggests that Moody's will also downgrade Italy in the next month. S&P cited a weakening economy and a "fragile coalition government" which was unable to "respond decisively". S&P raised its forecast of debt to GDP to a peak of 122.4% in 2012 and, in addition, lowered growth forecasts to +0.7% for each year till 2014, well down from the +1.3% forecast in May this year. In a negative scenario, Italy would be in recession next year with debt to GDP peaking at 123.9%. Finally, Moody's stated that there was a 1in 3 chance of Italy would be downgraded further by 2013. Italian 10- year bond yields are up 14bps to 5.72%.

European futures are not down by as much as I would have thought - around -0.6% it is clear that downgrades are the norm these days and an Italian downgrade was expected. However, the Euro is down -0.5% against the US$;

Siemens has withdrawn E0.5bn from an (unnamed, but not BNP) French bank and parked it at the ECB, reports the FT - getting hot out there;

German August PPI came in at -0.3% MoM (+0.7% in July) or +5.5% YoY (+5.8% in July), lower than forecasts of fat and +5.8% respectively;

Mrs Merkel lost the election in Berlin. Her coalition partner lost all their representation - getting to be a habit;

The Swiss Government forecasts GDP growth of +1.9% in 2011, lower than the previous +2.1% forecast. 2012 growth had been downgraded to +0.9%, much lower than the +1.5% previous forecast. The strong Swissy has had a significant negative impact on their economy;

President Obama revealed his tax and spend proposals. The measures have no chance of succeeding, given Republican opposition. However, it clearly is a political move in anticipation of next years Presidential elections. Need to check out polling results;

The Brazilian Finance Minister Mr Mantega wants the WTO to be given powers to act against countries that devalue their currencies to help their export position. The US and China opposes this move and the chances of this proposal succeeding are zero.

The Brazilian Real has taken a beating in September - its down 11% on the month against the US$;

Summary

Asian markets were mixed (India and China are up), though most of the rest closed lower. European markets have ignored the Italian downgrade - the FTSE is flat at present and looking as if it will continue to rise. Indeed, Europe is up across the board.

Brent is trading at US$109, with spot Gold at US$1787.

Bond yields are lower for the "safe" countries.

Best
Kiron

 

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