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Dec 20, 2014

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Home » Commodities » Video – Previewing the Week Ahead – Apr 18th-22nd – S&P Downgrades US Outlook, Euro-zone Sovereign Debt Jitters Re-Emerge

Video – Previewing the Week Ahead – Apr 18th-22nd – S&P Downgrades US Outlook, Euro-zone Sovereign Debt Jitters Re-Emerge

Nick Nasad
Chief Market Analyst


Key Themes as we Start This Week: Risk Sentiment

  • Euro-zone sovereign debt jitters resurface
  • S&P downgrades US outlook to negative
  • China raises bank reserve requirement ratio yet again.
  • Equities stumble, oil declines, gold higher.
  • Some pullback from higher yielders in a sign of “risk-off” trading.

Theme of the Week #1: Euro-Zone Sovereign Debt Jitters Re-Emerge

1. Greek Debt Restructuring

  • Story that has been building momentum, most notably last week following comments from the German Finance Minister than Greek debt restructuring may be necessary.
  • Greek paper say that Greece broached the subject – that it seeks restructuring – to EU/IMF at Ecofin meeting.
  • Greek debt at €340 billion. Pushing out payment length viable or only haircuts to bondholders will do the trick?
  • News denied by Greece. The head of the Greek central bank said a restructuring is not needed and would be catastrophic for the country, hitting bank and pension fund assets and closing off access to capital markets.

2. True Finns Get 3rd Place in Election

  • In Finland’s election, the True Finns a party with a strong anti-bailout message quadruple their vote.
  • Its membership in a future Finnish government could complicate future bailout talks with euro-zone nations, including the imminent rescue package for Portugal.
  • Finland’s parliament has the right to vote on EU requests for bailout funds, meaning it could hold up costly plans to shore up Portugal and bring stability to debt markets.

3. Weak Demand at Spain Auction

  • Spain’s Treasury sold 4.66 billion euros ($6.68 billion) of Treasury bills, and its borrowing costs rose after elections in Finland threatened to disrupt European efforts to stem the debt crisis.
  • The Treasury said it sold 3.5 billion euros of 12-month bills at an average yield of 2.77 percent, compared with 2.128 percent at the previous auction on March 15.
  • It also sold 1.15 billion euros of 18-month bills at 3.364 percent, compared with 2.436 percent in March.

4. Sovereign Debt Risk Indictors Rise/Yields in Euro-zone Periphery Rise

  • Yields on Spanish debt rose. The gap between Spanish and German 10-year yields widened to 219 basis points after the auction, from 204 basis points on April 15.
  • Yields on Greek two-year and five-year bonds rose above 18%.
  • Credit default swaps are also hitting new record highs for Greece.
  • Portuguese, Italian, Belgium debt, over all maturities rose as well.
  • European stocks sharply down, EUR slides as well.

5. Austria’s Ewald Nowotny (ECB Governing Council member):

  • “It’s quite obvious that both our interest-rate regime and our liquidity regime have been in crisis mode for quite a long period of time,” Nowotny said. For the euro region as a whole, “we’re not any longer in a crisis situation” and “this development will be reflected in the ECB’s policy.”
  • Investor expectations that the benchmark interest rate will be increased by another 50 basis points in 2011 are “well- founded.”

Euro-zone Releases


  1. Flash Manufacturing PMI (Apr): forecast 57.2, pr 57.5
  2. Flash Services PMI (Apr): forecast 57.0, pr. 57.2


  1. GER PPI (Mar): forecast 0.8%, pr. 0.7%
  1. GER IFO Business Climate (Apr): forecast 110.7, pr. 111.1

Theme of the Week #2: S&P Sends A Shot Across the Bow

  • S&P reaffirmed the “AAA” US rating
  • But, changes outlook on US rating from stable to negative.
  • Sees a 1-in-3 chance of lowering US rating in next 2 years.
  • Caused a sharp sell off in US equities, and doubles losses in Europe.
  • Caused overall investor sentiment to dip, risk-off trading dominates as a result.
S&P Statement:
  • “Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.”
  • “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
  • “We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.”

Moody’s on Other Hand

  • Moody’s says willingness to cut deficits is there.
  • “The latest budget proposals from President Obama and the Republican leadership would lower the U.S. deficit and debt levels and be positive for the country’s credit rating, which is Aaa with a stable outlook, Moody’s Investors Service said Monday.
  • Both proposals mark a significant shift towards indicating a willingness and plan to improve its debt outlook. “Either the president’s revised proposal or the Republican proposal would improve the U.S. government’s creditworthiness,” Steven Hess, a senior credit officer at Moody’s wrote in a report.
Implications of S&P Move
What happens over the battle of the debt ceiling vote?

–      Is there a chance this acts as a wake-up call and moves both parties towards an earlier increase in the debt ceiling, or will politics prevail, and on plans to cut the deficits or will we have another showdown like the nearly averted government shutdown?

Does this S&P action dent sentiment the rest of the week, or is it a one-day storm?

–      Will equity markets digest this news and recover?
–      Austerity would be bad for stock market.

–      Can a more austerity minded US fiscal policy (austerity) cause slower global economic growth?

  • Today we saw that concern in a move away from higher yielders linked to global growth like AUD, NZD, CAD and into USD, CHF, JPY.
  • Gold is also in strong demand amid worries about the big country’s debt levels.
  • Fiscal consolidation in the US would be a long-term USD positive, while a negative in short term.

US Releases


  1. NAHB Housing Market Index (Apr):  16   forecast 17, pr.  17


  1. Housing Starts (Mar):    forecast 0.53M, pr. 0.48M
  2. Building Permits:    forecast 0.55M, pr. 0.52M


  1. Existing Home Sales (Mar):    forecast 5.04M, pr. 4.88M
  1. Jobless Claims:     forecast 0.6%, pr. 0.5%
  2. Philly Fed Manufacturing Index (Apr):    forecast 37.1, pr. 43.4
  3. CB Leading Index (Mar):     forecast 0.3%, pr. 0.8%
  4. OFHEO House Price Index (Feb):    forecast 0.2%, pr. -0.3%

What are we Looking for in USD?

  • 3 Fundamental Keys for this week:.
  1. How do stocks and bond markets respond to S&P tomorrow and rest of the week?
  2. Did housing rebound from the cellar in March?
  3. Do jobless claims fall back below 400K, Philly Fed stays strong?
  • US 1Q growth is being priced in as lower than expected (below 2% annualized). While not too much data this week, what does data going forward tell us about 2Q?
  • US datastream will impact FOMC direction at end of QE2.

Thin Week For UK

  • BOE Minutes can give us more insight into what the Bank of England is thinking regarding inflation, growth and the need to boost interest rates.
  • Minutes are expected to show 3 members voting for rate hike, 6 voting to keep rates steady.
  • Any clues as to what happens at May meeting? That has best chance to impact GBP this week.
UK Releases
  1. Rightmove HPI m/m (Mar): 1.7%, pr. 0.8%
  1. BOE Meeting Minutes
  1. Retail Sales m/m (Mar):   forecast -0.5%, pr. -0.8%
  2. Public Sector Net Borrowing (Mar):  forecast 19.0B

Canada Releases

  1. International Securities Purchases (Feb):
    C$2.50B, forecast  C$11.23B, pr. C$13.37B
  1. CPI m/m (Mar):    forecast  0.7%, pr. 0.3%
  2. Core CPI :               forecast 0.3%, pr. 0.2%
  3. Wholesale Sales:   forecast 0.1%, currently 1.5%
  1. BOE Rate Decision:   forecast 0.50%, pr. 0.50%

Therefore our 3 fundamental keys for Canada this week are:

  1. What was the inflation situation in March?
  2. Did consumer spending rebound in Feb?
  3. Where does oil go with added uncertainty in global picture?

Overview for this Week

Watch for sentiment, equities to play key role. 

  1. Do equity market rebound from the sharp losses to start the week?
  2. Do we reverse some of these safe haven flows or build on them?

Fundamental Data to watch out for:

  1. US – home starts, existing home sales, jobless claims, Philly Fed
  2. GER – Ifo Business Climate
  3. UK – BOE Minutes
  4. CAN – CPI, retail sales,
Does Euro overcome its recent sovereign debt jitters and rise on back of rate expectations once again?
What does this debt debate mean for USD in medium term? Further weakness as fiscal policy added to loose monetary policy as a reason to sell? Or will emphasis on the issue cause action?


Nick Nasad
Chief Market Analyst

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.


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