Everyone and their mother seem to have given some sort of market warning over the past 24-hours. This has allowed negative sentiment to sweep across financial markets on worries about the U.S. debt ceiling, and a warning by Fitch that U.S., U.K. and Spanish ratings are under threat. Even the long EUR positions have got a slap in the face this morning as euro-group President Juncker gave the single currency the proverbial "kiss-of-death" by iterating that the currency was “dangerously” high. It was always to happen, as Europe cannot grow with too high a currency value. But now, when the market has got itself mostly long EURs!
Not helping matters, and weighing on sentiment, was a warning by the World Bank yesterday, citing that U.S. budget battles are restraining global economic growth that could certainly outpace any risks that even a renewed euro-crisis could inflict. This was the sucker punch that followed the "questionably reliable" Fitch Credit rating agency warning that it could downgrade the U.S.’ credit rating if bickering lawmakers continued to incorrectly prioritize their necessary objectives. Fitch said that the U.S. faces a “material risk” of losing its triple-A status if there is a repeat of the 2011 shenanigans that occurred over raising the country’s self-imposed debt ceiling.
Europe did not get escape the credit rating agency’s clutches; it, too, was forewarned that the periphery nations were firmly in their sights. Fitch indicated that Spain would continue to face downgrade risks even if it avoids having to ask for a bailout, while Ireland could claw its way back into the single-A rating band if a deal is struck to share the burden of its banking debts. Last week the Emerald Isle had a successful syndication, reopening an older issue of 5-year debt. Strong demand happened to push yields sharply lower. Mostly with rating agency, perception is the doomsayer. Despite all else, unreliable, questionable and perhaps politically motivated, rating agencies still command markets full attention!
Even encouraging December U.S. retail sales yesterday has failed to lift sentiment enough to outpace intensifying concerns over the U.S. debt ceiling. When Armstrong’s interview is come and gone, expect the U.S. press corp to return front and center with everything that’s bad about the U.S. debt ceiling. Add U.S. sales to a weaker than expected 2012 German GDP report and we have a cocktail of questionable reasons why this year's new risk longs should stay that way. EM currencies have mostly led the way lower in the overnight session, with PLN and HUF losing ground against the EUR and ZAR under pressure against the ‘big’ dollar.
The eurozone's rate of inflation remained above the ECB’s target last month, despite a drop in global fuel prices. Consumer prices were +0.4% m/m and +2.2% y/y and just above the Central Bank's desired rate of +2%. This will surely add to policy reluctance to ease rates anytime soon. Some members recently reiterated that they do not believe that any material growth would come from cutting rates any further than the +0.75% at present. On the other hand, persistently high rate of inflation will discourage consumer spending somewhat as wages have not been rising in step with inflation. Globally, Central banks have been relying on the consumer to spend their way to growth and it seems that they still require incentives.
Despite the global gravitation in the past 24-hours to owning more dollars and yen, the "single" currency has received an energetic boost to drag it from its European lows (1.3262) after a strong German 10-year bund auction and after the ECB indicated that they do "not target exchange rates." The 2/23 Bund auction produced the strongest cover (1.667) of any Bund auction since last August (1.842) and the strongest of any 10-years since 2009. This uptick has saved many long EUR positions. Whatever longs remain; they are most likely only narrowly in play and with a price action that threatens to ease. Expect the market to test the momentum of this bounce higher as we change up and head into the American session. Will intraday longs that doubled down now be capable of driving this currency pair towards this week’s high (1.3404)? Perhaps the lazy longs have been given a get out of jail card!