SCOREBOARD: Ratings run

The euphoria didn't last long. Markets, initially buoyed by the European summit, seem to have lost that early enthusiasm after ratings agencies (Moody's and Fitch) came out and said the summit didn't really change anything nor diminish the risk of credit downgrades on European nations – Moody's will review the EU in the first quarter of 2012. Fitch said the failure to come up with a comprehensive solution actually increased short-term pressure on ratings. So there you have it. Combine that with comments from Mario Draghi that appeared to rule out aggressive ECB action and further commentary from the Bundesbank head reiterating that such action would be illegal anyway, and it seems many in the market believe we are back to square one.

Italian bond yields spiked higher initially, as you'd expect, but they did manage to get out €7 billion of 12 month bills at a cheaper rate than in November, if just marginally – 5.952 per cent against 6.087 per cent. Cover was even good at 1.925, although rumours were going around that the ECB bought short-dated Italian paper just prior to the auction. Maybe that's true, but we also have to consider the fact that Italy can probably put up with this crisis for some time. Indeed, the Bank of International Settlements reckons Italy would be able to cope with high borrowing costs for a few years given their relatively long debt maturity (average of seven years). According to the BIS, the cost of servicing debt would rise by only 0.95 per cent of GDP if the 10-year stayed at the record high of 7.48 per cent reached in November. I suspect this partly explains the steepening of the Italian curve – 2-year yield down 11bps to 5.84 per cent, while the 10-year rose 20bps to 6.56 per cent (high of 6.79 per cent). Elsewhere, bunds rallied, the 10-year yield down 14bps to 2.02 per cent and US treasuries have followed the same path – the 2-year yield unchanged at 0.22 per cent, the 5-year off 3bps to 0.86 per cent and the 10-year down 4bps to 2.02 per cent. Australian futures so far are 5 ticks higher on the 3s (96.89), and 6 ticks on the 10s (96.125).

In the equity space, things were reasonably messy. European stocks ended the session weaker – the Dax off 3.4 per cent, the CaC down 2.6 per cent (financials down over 5 per cent in each case) and the FTSE off 1.8 per cent. Across the Atlantic on Wall Street, it was almost as bad with the S&P500 off 1.5 per cent (1,236), led lower by basic materials, energy and financials. Commodities were belted as well, gold in particular, which is off $30 to $1,665. WTI is then 1.6 per cent lower ($97.86), Brent is off 1.3 per cent ($107) while copper has fallen 2.6 per cent. Otherwise the Dow closed down 163 points (12,021), the Nasdaq gave up 1.3 per cent (2,612) and Australia's SPI is 1.8 per cent weaker (4,182).

For forex, the euro tumbled overnight and the trajectory was pretty much one way, losing 160 pips compared with 1630 AEDT yesterday (at 1.3180). The Australian dollar followed suit and has lost a big figure so far to sit at 1.0070. Sterling, for its part, is down 50 pips to 1.5584, while the yen is at 77.89, little changed from yesterday afternoon.

Not much else to it really. A pretty simple European driven session. There wasn't even any data to speak of and not much news flow otherwise. Is it Christmas yet?

Looking at the day ahead, we see NAB's business survey at 1130 AEDT alongside dwelling starts. People don't forecast the business confidence numbers, but generally business is dealing with a strong domestic economy and rate cuts – which you'd think would boost confidence. But then obviously the eurozone crisis would be weighing heavy so they'll be an interesting set of numbers.

Tonight watch out for US retail sales (November) where the market looks for a 0.6 per cent rise, adding to the strong pick-up in US consumer spending of late. US business inventories for October are also due and then in Europe, watch out for the German ZEW (Dec) and UK CPI (Nov).

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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