Sentiment is optimistic this morning even as borrowing costs for Spain and Italy surged at an auction overnight, and after Moody’s downgraded 28 Spanish banks. U.S. stock futures are trading moderately higher rebounding from two-week lows, bourses in Europe are mixed with modest changes, Asian indices fell slightly, and corn hit a seven-month high. The euro depreciated nearly -0.1% to $1.2493, and Oil is trading below $80 per barrel for a fourth day in a row.
European Woes: Moody’s Downgrades 28 Spanish Banks
Spain’s largest two lenders, Banco Santander SA (now Baa2) and Banco Bilbo Vizcaya Argentaria SA (Baa3), were among the 28 banks that were included in Moody’s downgrades that came as a result of the country’s sovereign debt and souring real-estate loans. The downgrades included six banks being downgraded four levels, 10 by three grades, and the rest receiving one and two-tier cuts. The cuts come after a three-step reduction in Spain’s credit grade to Baa3, one-step above junk, in a June 13 release citing the nation’s debt, a weakening economy, and limited access to capital markets. The nation remains on review for further downgrades amid plans to borrow €100B to recapitalize their banks from EU rescue funds.
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After the review was conducted and no banks were cut more than forecast, the markets shrugged off the downgrades as yet another overhyped story of 2012. The fact that there is less uncertainty now that we know the extent of the cuts has improved investors confidence.
For now I will spare you the full rant I’ve already written (I know your time is valuable). Let’s see how today plays out and I’ll get busy writing this evening, at the latest, after I get a better feel for the markets continued reaction to the downgrades. Lets also tune in for rumors before an important upcoming EU Summit.
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Sentiment is mixed this morning as Merkel, France’s Hollande, Italy’s Monti, and Spain’s Rajoy meet before next week’s EU summit. EU stocks are off their lows of the day, but are trading below yesterday’s closes, except for Spain’s IBEX and Italy’s FTSE MIB which have both fully rebounded into gains for the day. EU sovereign debt spreads to bunds are mostly tighter this morning. U.S. futures are moderately higher on the day, the FX market is relatively muted, commodities have experienced only modest price moves overnight, and Treasury yields are mixed with the 2yr down -0.3bps versus a gain of +2.1bps for the 7yr.
Moody’s Cuts the Credit Rating of 15 Banks
Moody’s Investors Service downgraded the credit ratings of 15 large global banks, after announcing on Feb. 15 that it was reviewing grades for 17 banks. Credit Suisse received the maximum reduction Moody’s can make when conducting a review of global banks with capital market operations, cut three levels. The banks with the highest stand-alone credit ratings include JPMorgan (despite the $2B trading loss), HSBC Holdings, and the Royal Bank of Canada. On the low end of the spectrum are Bank of America and Citigroup who are but two levels above junk at Baa2. Societe Generale and Royal Bank of Scotland Group were cut one grade, and Deutsche Bank AG, BNP Paribas, and Credit Agricole SA (the latter being French) were cut by two levels. Goldman Sachs, Morgan Stanley, and Barclays all had their short-term ratings cut from P-1 to P-2. “All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities,” Moody’s Global Banking Managing Director Greg Bauer said in the statement.
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