The US congressional committees set up to find $1.2 trillion worth of savings will not be able to meet its goal. As a result, we're going to see automatic cuts triggered consisting of military spending and cuts to certain entitlement programs. While in of itself this should not hurt the US standing in regards to its credit rating, if some of these automatic trigger cuts were to be unwound it could then create a problem for credit rating agencies.
With word that the committee has failed to start the week, we're already seeing Sen. John Kyl and others tempting to save the Pentagon from these cuts, thereby weakening the original agreement set up during the debt ceiling debate.
From CBSNews: Sens. John McCain, R-Ariz., and Lindsey Graham, R-S.C., say they are writing legislation to prevent what they say would be devastating cuts to the military. House Republicans are exploring a similar move. Democrats maintain they won't let domestic programs be the sole source of savings.
With nearly $500 billion in defense spending and an equal amount of domestic dollars at stake, plenty of lawmakers are ready to try blocking all or parts of those automatic cuts, if only to win favor from backers of programs whose funds are on the chopping block.
The automatic cuts, enacted in this summer's debt-limit deal between Obama and congressional Republicans, were designed to be so distasteful that they would add pressure on the supercommittee to craft a compromise.
Any attempts to change the automatically triggered cuts may face a veto threat from the President, but at the same time it is hard to slash military spending by such strong degrees when the argument is that it can make America less secure.
With the week starting with the failure of the debt ceiling committee it has imbued the currency markets, as well as other financial markets, with a heavy sense of risk aversion. The benefactors have been the US dollar and the Japanese yen, the expense of higher-yielding commodity currencies - Australian, New Zealand, and Canadian dollars - as well as the euro and pound.
Japanese Trade Data, and Concern from China, Adds to Risk Aversion
We had further risk aversion factors on display as well.
From Bloomberg: Japan's finance ministry reported today that shipments abroad fell 3.7 percent in October from a year before, the first drop in three months and an indication the nation's rebound from the record March earthquake will slow.
In addition, we have concerned rhetoric coming from the Chinese:
The world economic situation is extremely severe, China's Wang said at a financial work meeting in Hubei province, state news agency Xinhua reported late on Nov. 19. The global economic recession triggered by the international financial crisis will be long-term, Xinhua cited Wang as saying.
The prospect of weaker growth in Asia will undermine demand for commodities, which may undercut the allure of the Australian dollar.
European Crisis Continues
On the European front, we see the continued concern about the sovereign debt crisis as Moody's warned that it may be looking to downgrade France.
From Reuters: Ratings agency Moody's believes the recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating, newspaper Le Figaro on Monday reported the agency as saying.
Presistently high financing costs combined with a deteriorating economic outlook could increase the difficulties that the government faces, with negative implications for credit, the newspaper quoted Moody's as saying.
The spread between French and German 10-year yields rose to 172 basis points or 1.72% before retreating prior to the NY open.
The Spanish-German 10-year yield rose to as high as 469 basis points overnight continuing the pressure on that country's bonds even as it went to the polls and gave a resounding victory to Mariano Rajoy.
From Financial Times: Mariano Rajoy led Spain's centre-right Popular party to the biggest election victory in its history on Sunday, consigning the incumbent Socialists to the political wilderness and making them the latest casualties of the eurozone's deepening sovereign debt crisis.
With 99 per cent of the votes counted, the PP had secured 186 seats in the 350-seat lower house of parliament, leaving the Socialists with just 110.
With troubling signs in the US, Asia, and Europe, looks like investors and traders will be seeking safety haven at the beginning of the week and it is a trend that should continue as further macro data underlies the influence of the sovereign debt crisis on the real global economy.