Financial markets remained firm in Asian session on Monday, carrying forward the positive sentiment after the better-than-expected US non-farm payrolls. Over the weekend, Germany and France held a joint conference and pledged to 'do the necessary to secure the recapitalization' of European banks. In the commodity sector, the front-month contract for WTI crude oil approached 84 while the equivalent Brent crude contract edged higher from Friday's close. We doubt how long the bullishness can sustain given continued deterioration of the sovereign debt condition in the Eurozone. Fitch trimmed credit ratings of Spain and Italy with further downgrades possible as both countries were put on negative watch. Meanwhile, Moody's has placed Belgium's credit rating on review. The rating agency also downgraded 12 UK financial institutions reflecting less systemic support from Government.
At a joint press conference in Berlin, President Nicolas Sarkozy and Chancellor Angela Merkel assured that they are committed to a 'comprehensive' resolution, which includes bank recapitalization, to Eurozone's debt crisis and the while package will be ready by the end of the month. A deadline of the G-20 summit on November 3 is set to deliver a response to both the immediate crisis and 'structural defects' in the region.
Hopes of an effective plan to resolve the sovereign and banking problems in the Eurozone overshadowed further credit downgrades. Fitch trimmed credit ratings of Spain and Italy, to AA- from AA+ and to A+ from AA- respectively. Lower credit ratings sent borrowing costs higher, making these countries more difficult to tap public funding. According to the agency, Italy's sovereign risk profile has been weakened by the 'intensification of the Eurozone crisis that constitutes a significant financial and economic shock. It takes time for the government to devise 'a credible and comprehensive solution to the crisis'. Such a solution is 'politically and technically complex'. Regarding the situation in Spain, Fitch's said that the downgrade reflected the intensification of the Eurozone crisis and risks to the fiscal consolidation effort arising from the budgetary performance of some regions as well as weaker growth prospects in the medium-term.
Moody's warned that it may cut Belgium's credit rating after the bailout of the French-Belgian Dexia. Belgium will buy the Belgian banking business of Dexia for 4B euro and provide the bulk of guarantees to cover leftover assets of the parent group. According to the agency, the country's Aa1 rating is currently under review due to materially increased funding costs for sovereigns and banks of countries with high debt, risks to economic growth and the weight on public finances of supporting the banking sector.
In the UK, 12 financial institutions were also downgraded by Moody's, reflecting 'a deterioration in the financial strength of the banking system' and a lowering ability of the government to given supports. The downgrades include the nationalized RBS and part-nationalized Lloyds TSB.
We have a light calendar today with Japan, the US and Canada on public holiday.
Commitments of Traders:
With the exception of natural gas and gasoline, speculators were bearish on the energy complex in the week ended October 4. Net length for crude oil futures shrank -29 522 contracts to 108 164. Heating oil futures recorded net short for the time since August 2010. Net length for gasoline futures rose the first time in 4 weeks, gaining +3 227 contract to 38 702. Net short for natural gas futures decreased to 168 700 contracts.
With the exception of gold, speculators remained bearish on the precious metal complex. Net length for gold futures climbed +5 355 contracts to 133 156. while that for silver futures fell -3 525 contracts to 11 900. For PGMs, net lengths for platinum and palladium futures declined to 20 413 and 6 194 contracts, respectively, during the week.