SCOREBOARD: S&P brush-off

Investors didn't lose any sleep over S&P's eurozone downgrades, with key bond yields dipping overnight.

US markets were closed for Martin Luther King Day, but there was plenty of action out of Europe to keep punters busy. Following S&P’s decision to downgrade their credit rating, France auctioned off €1.895bn of 12-month bills at a yield of 0.406 per cent, down from the 0.456 per cent they paid only a week or so ago. The 3-month and 6-month paper (over €8bn in total) was also given at lower yields and this seems to have given a boost to risk appetite overnight, although the euro is up only 30 pips or so (1.2665, to a high of 88).

Elsewhere it seems like markets have brushed off S&P's decision, and its announcement last night that the EFSF would lose its AAA rating (it's been cut to AA ) – and there are good reasons for that. Look at the dwindling number of AAA sovereigns. The reality is that the more the ratings agencies downgrade, the less relevant ratings become – the concept becomes less meaningful without a deep, liquid pool of AAA rated paper. Just look at Treasuries. So of the G7, Germany, the UK and Canada are AAA according to S&P. The US and France are AA , Japan is AA- and Italy is BBB . Outside of the G7 there are only about nine, less deep, less liquid, AAA rated countries. Again that’s only S&P – both Fitch and Moody’s have the US and France at the top rating (although Moody’s said they may review France’s stable outlook later this quarter).

So Spanish and Italian bond yields came in again last night, if just marginally, such that the 10-year yields are down 4bps (5.185 per cent) and 2bps (6.622 per cent) respectively, and spreads to bunds are about the same given lack of action on the bund front. US Treasury futures then sold off a little, with the 2s down to 110-11¼ from 110-11¾ while the 10s were down to 131-16 from 21. Aussie futures followed that lead, with the 3s and the 10s down about 4 ticks apiece (on a 5-tick range) to 96.86 and 96.235.

European equities had a decent bid, with the Dax up 1.3 per cent, led higher by consumer goods, utilities and tech stocks. It’s a similar story in France, where the CaC closed 0.9 per cent higher (with tech, consumer goods and financials leading the charge) while in the UK, the FTSE was up 0.4 per cent (basic materials, tech and health were the key outperformers). S&P futures closed up 0.2 per cent (1291), while for Australia, the SPI was also 0.2 per cent higher (4137).

As for forex and commodities, the Australian dollar was up about 30 pips (from 1630 AEDT) on a 44-pip range to sit at 1.0309 currently. Sterling then traded on a 30-pip range and sits a little higher at 1.5322 while yen didn’t do a great deal – it was down smalls at 76.74. Gold ( $3 to $1643) and copper ( 1.1 per cent) were then both higher, although silver fell about 2 per cent. Crude was up 1 per cent on WTI ($99.69) and 0.7 per cent on Brent ($111.2).

Looking at the day ahead, the data flow kicks off with New Zealand credit card spending at 0845 AEDT. Chinese GDP and industrial production is due at 1300 AEDT and the market expectation is that GDP will rise 8.7 per cent year-on-year to the fourth quarter, while industrial production is expected to rise 12.3 per cent year-on-year. Then tonight we see EC and UK CPI (for December), the German ZEW survey (for January) and for the US, the Empire State manufacturing survey (for January). In terms of central bank action, the BoC meets although no changes are expected.

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

Follow @AdamCarrEcon on Twitter.

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