Downgrade Concerns Spread to France

 
on August 11 2011 2:45 AM

Stock markets got hit again yesterday as driven by concerns that credit ratings of French debts will be downgraded. Wall Street slumped with DJIA and S&P 500 losing -4.62% and -4.42% respectively while European bourses sank 3-5%. In the commodity sector, oil initially followed equities and fell but then reversed after the DOE/EIA reported bigger-than-expected inventory draws last week. The front-month contract for WTI crude oil ended the day at 82.89, up +4.53%, while the equivalent Brent crude contract soared +4.01% to settle at 106.68. The WTI-Brent spread remained wide at 23.79 despite the drop in Cushing stock. Gold strengthened further and broke above 1800 for the first time on record. After gaining +2.35% yesterday, the benchmark Comex contract extended the rally in Asia today to as high as 1817.6 before pulling back to around 1790.

After US' AAA debt ratings were cut by S&P, market concerns about downgrades have spread to core economies in Europe. As a big holder of sovereign debts, French banks are susceptible to have their ratings trimmed by agencies. Societe Generale shares dived more than -20% at one point before paring losses and ended the day down about -16%. CDS for French bonds also soared as speculations intensified. Sentiment was only calmed after S&P, Fitch and Moody's affirmed the nation's triple ratings with 'stable' outlooks.

The BOE lowered its economic forecasts in the latest quarterly inflation report. Policymakers believed risks to growth are skewed to the downside as slowdown in recovery may turn out to be more persistent than previously expected. The BOE retained the view that inflation will return to a little below target in the medium-term but expected it to fall rapidly to around +1.8% in 2 years. The BOE left the Bank rate unchanged at 0.5% and the asset purchase program at 200B pound at the meeting last week. Yet, it reiterated the flexibility to add or remove stimulus measures when conditions warrant.

In the US, initial jobless claims probably added +1K to 401K in the week ended August 6. Trade balance should have dropped to 48.0B in June from 50.2B a month ago. Canada's new housing price probably climbed +0.3% m/m in June after gaining +0.4% in May. The country's trade deficit might have increased to CAD 0.9B in June from CAD 0.8B in the prior month.

Share this article