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Debt concerns in advanced economies dominated financial markets yesterday. Reports that Greece had requested debt restructuring from the EU/IMF weighed pressured the euro, sending EURUSD to a 2-week low. European bourses declined with the DAX and CAC 40 Indices losing more than -2%. In the US, S&P put the US AAA credit rating on negative outlook, suggesting a 33% chance that it would cut downgrade the country's debts with the coming 2 years. Wall Street tumbled with both DJIA and S&P 500 Index sliding over -1%. In the commodity sector, gold struck a new record high of 1498.6 before closing at 1492.9, up +0.46%, as sovereign and debt uncertainties drove demand higher. Oil plummeted with the front-month WTI crude contract falling for the first time in 4 days to as low as 106.54 before settling at 107.12, down -2.32%. The equivalent Brent crude contract slipped to a 3-day low of 121 before ending the day at 121.61, down -2.49%. Investors also worried about OPEC's comments that high oil prices are damping demand.
The Eleftherotypia newspaper said that Greece asked the EU/IMF for debt restructuring over the weekend. While the rumor was denied by both Greek and IMF officials, market sentiment was hurt. The situation was exacerbated after German Budget Minister Otto Fricke said that 'the signs aren't good' when he was asked about if Greece could sustain through summer without having to restructure its debts. Greek and Portuguese yields soared to record highs while peripheral spreads widened sharply. Meanwhile, the Finnish election makes the Portuguese situation more ambiguous. The rise of the True Finns party raises fears that Finland may refuse to contribute in a 70B euro bailout plan for Portugal.
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In the US, S&P affirmed US' AAA rating in debts but lowered the outlook to 'negative'. The rating agency said a downgrade cannot be ruled out if the government fails to find a resolution to deal with the deficit problem in 2 years. S&P's move may speed up policymakers in reaching an agreement on the budget as a downgrade, which would place the US rating below that of Germany and France, is a huge issue as it threatens US' status as the most powerful economy in the world. The US dollar may risk losing its status as the dominant reserve currency.
The OPEC talked more about its view on high oil prices and world demand. After confirming the country has lowered oil production in March, Saudi Oil Minister Ali al-Naimi warned that global economic growth may remain weak and the recovery remains 'patchy' as unemployment in many countries remains at 'unacceptable levels'. Kuwait's Oil Minister Sheikh Ahmad al-Abdullah al-Sabah stated 'spending on oil imports could represent a significant economic burden for many import dependent countries' at current price levels. Other OPEC ministers generally said oil supply is ample and high prices are a risk factor to the economy.
On the dataflow, Eurozone's flash manufacturing PMI data probably slid to 57 in April from 57.5 in the prior month. In Canada, headline inflation is expected to have accelerated to +0.6% and +2.8% on monthly and annual basis respectively. In the US, housing permits probably climbed +4.45% to 540K in March while housing start jumped +8.56% to 502K last month.
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