No one needed to convince the credit agency’s to have a second look. Moody’s had strong enough reasons to strip the UK of its coveted triple-A credit rating late last Friday. It was the timing of the downgrade that caught many off guard. Investors had assumed that if there were going to be one, it would occur after the UK’s budget to be delivered next month. So far, the end result has seen sterling plummet to its lowest level outright, against the dollar (1.5075), in more that 30-months.
Moody’s highlights that economic recovery in the UK has proved to be very slow and that weak growth could extend well into the second-half of this year. This description alone could be assigned to a number of different economies. In hindsight, a weaker pound will prove to be a blessing for the country’s “blue-chip” index, the FTSE. With the majority of UK companies earnings coming from overseas, a softer pound is a plus when translating foreign profits. With nearly all the negative reasons now exposed for a weaker pound, sterling will now be thinking of forming a base in the short-term. North America would be happy to take some profit off the table.
The Italian debt market remains better bid ahead of the Italian general election exit polls. The market should know the results this evening or tomorrow morning at the latest. Market consensus is looking for a Bersani (PD, center-left) victory, with possible alliance with former Prime Minister Monti (center). Any combination of this outcome should prove to be market positive, in terms of risk appetite. However, a strong vote for the anti-establishment party “Movimento 5 Stelle” could end up extending any political negotiations and heighten near-term uncertainty. We all know that markets historically hate uncertainty and this outcome will only extend the strong negative impact on ‘risk appetite’ for single currency in the short term.
Until Italian exit polls results start to trickle in, the EUR will lack heartfelt trading direction. A protest vote in the election would raise the risk of a result that would undermine Europe’s efforts to end their three-year debt crisis. A bad or messy outcome will likely have a market wanting to sell the EUR. Currently, cross trading is triggering the weak EUR short stop-losses that are scattered on top towards 1.33. Watch the debt market spreads for clues. The market should expect a wider bund/treasury spread to weigh on the single currency recovery. Do not be surprised to see option expiries again cloud market movement. In the end, it’s just another unknown variable that is thrown into the EUR mix.
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