Wall Street was up yesterday with DJIA and S&P 500 gaining 0.65% and +1.03% respectively. European peripheral yield spreads also narrowed as Merkel and Sarkozy had reached a 'comprehensive' agreement on treaty and fiscal rule changes. Meanwhile, Italy's new fiscal package worth of 30B euro was also taken positively. Despite a strong start yesterday, market sentiment deteriorated after a report that S&P has placed 15 European countries, including Germany and France, under negative watch. Asian shares largely turned into red Tuesday.
It's revealed that Chancellor Merkel and President Sarkozy agreed on several measures to strengthened cooperation in the Eurozone and 'ideally' among EU countries. The leaders pledged to implement more automatic sanctions for nations that fail to meet the 3% fiscal deficit target. Moreover, other than Greece, no other nations will seek private sector participation in future sovereign rescues. They expected the new ESM will be brought forward to 2012, with the decision-making mechanism basing on a qualified majority rather than unanimity. Same as before, the leaders continued to see the joint issuance of European bonds and full fiscal union not applicable for the moment. In Italy, Prime Minister Monti announced a 30B euro new austerity plan with 10B euro of which being growth stimulus. It's expected that the package will be approved by December 22.
Rating agency S&P warned of a mass downgrade of European countries' credit ratings after placing 15 of it under negative watch. In a statement, the agency said the action was prompted by the 'belief that systemic stresses in the Eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the Eurozone as a whole'. According to S&P, if the downgrades materialize, ratings of Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg would be cut by one notch while many others will have their ratings down by 2 notches.
The RBA just announced to cut the policy rate for the second consecutive month, by -25 bps, to 4.25% as policymakers worried that the economic outlook will slow further and Australia's inflation rate will remain within a target range of 2-3% in the medium term.