Global risk assets had a reasonably positive session overnight with European and US indices all in the green, albeit with moderate gains. With the session light on economic data, rumours of an S&P a downgrade to both Germany and France from their AAA rating and that all 17 nations are under review for a downgrade, helping unwind gains made through the two sessions.
The Australian dollar which has traded back to down to 1.02 USD had steady momentum for about 12 hours straight as it peaked at 1.03 USD just after midnight local time. Yet with these rumours hitting the market the local unit has shed about half of the gain.
The Euro obviously suffered larger falls with overnight highs of 1.348 USD met with a 0.9 cents decline through to the close of US equity markets. The credit ratings will put further pressure on Government bond auctions and the ability for the European Financial Stability Facility and with the S&P previous cut of the US rating from AAA to AA+ expectations would be for the cut to occur.
The session did see Italian funding costs drop back to 6.16% for ten year bonds as Italian PM Mario Monti begins the process of pushing through Austerity package with an aim to recoup 30 billion euro.
The package includes an increase to the pension age from 62 to 66 and a range of increases on property and luxury items. 20 billion is set for will go towards the deficit while 10 billion will go towards stimulating growth as the Italian economy stairs down its 5 recession since 2001 next year. These moves were the primary driver for gains in the European session with markets strength a vote of confidence to Monti's much need structural reforms.
Further confidence was also drawn from a European Union treaty rewrite as Merkel and Sarkozy seek to reinforce unity with the ongoing debt crisis, with a focus on enforcing deficit and debt levels previously agreed to, an enforce penalties on breaches. The fiscal accord will help dent some expectations of the shared currencies breakdown.
Unfortunately for our domestic scribes even though we have a rates decision which puts the focus back on local data it's the European debt concerns that remain the major directive in the near-term. Inflation, unemployment and growth all are within acceptable ranges, so the RBA is looking at overseas concerns weighing on global markets, and how long the European debt dramas remain a considerable drag on the global economy.