Moody’s: U.K.’s AAA Rating Will Withstand Economic Challenges

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Includes: ERO, EU, EWU, FXA, FXB, FXE, IRL
by: RANsquawk

  • Stress tests for Greek banks have been postponed by a month until the end of October

  • Irish finance minister said that Ireland will not need EU financial aid

  • Portuguese and Irish spreads re-widened to European life time highs ahead of debt auctions on Tuesday and Wednesday

  • Moody’s said that the UK’s AAA rating will withstand economic challenges and it maintained UK’s stable outlook

Overnight News

ASIA

Japanese market holiday.

In other news, China faces a low risk of inflation in the coming years and can look forward to continued buoyant growth if it can avoid asset bubbles, according to a former adviser to the PBOC, Fan Gang. (RTRS)

Also, China should raise mortgage rates and allow fixed-term deposit rates to float higher to curb inflation expectations, according to a PBOC official, Ji Min. (Sources)

US

The Federal Reserve will cut its growth forecasts and Europe’s economic bailout is failing, according to Pimco’s chief executive El-Erian. (Sources)

Bonds

EUROPEAN GOVERNMENT BONDS

Bund futures traded under pressure during the European session amid renewed risk-appetite, with European peripheral 10-year bond yield spreads with respect to bunds seen general tightening in early European trade. News that stress tests for Greek banks have been postponed by a month until the end of October, comments from Irish finance minister rejecting the need for any EU/IMF bailout fund, as well as expectations from Portuguese government to bring forward the outline for 2011 budget, all helped risk-appetite.

However, as the session progressed, many peripheral European spreads widened, in particular, Portuguese and Irish spreads widening to fresh Euro lifetime highs ahead of auctions from these countries later in the week. Also, comments from Goldman Sach’s economist Eric Nielsen saying that there is still a measurable risk that Ireland and Portugal may access the European Financial Stability Fund and the IMF, weighed on sentiment. Moving into the North American open, bunds have come off their worst level, still trading in negative territory, with European peripheral spreads demonstrating a mixed picture.

In other news, ECB's Honohan said Anglo Irish capital requirement will be less than numbers recently touted, and EU's Rehn said that he has full confidence that Ireland will act with determination to repair its economy, and banking sector. (Sources/RTRS)

Elsewhere, all three of the major rating agencies have given a preliminary AAA rating to the European Financial Stability Fund (EFSF).

Maturity

2

5

10

30

Bund (Dec 10)

Level

0.793

1.469

2.460

3.076

129.57

Change (bps)

2.169

3.619

3.462

3.008

-0.2

Click to enlarge

GILTS

NYSE LIFFE Gilt futures traded in tandem with bunds in negative territory during the European session, and moving into the North American open prices have come off their worst levels but are still trading lower.

In other news, Moody’s (NYSE:MCO) said that despite a weak post-crisis balance sheet and challenging economic outlook, the UK is able to meet these challenges whilst maintaining its AAA credit rating, and hence the UK rating retains a stable outlook. It added that UK’s rating could be pressured if economic growth slows significantly, and reduced commitment to fiscal consolidation, however UK's economic and institutional strength still score very high. (Sources)

Elsewhere, the UK economy continues to recover from the effects of the financial crisis, according to BOE’s Dale in the Bank of England quarterly bulletin, adding that the adjustment process has been slow and painful and doubts remained about the durability and speed of the global economic recovery going forward. (Sources)

· Major Banks Mortgage Approvals (Aug) M/M 45K vs. Exp. 46K (Prev. 47K)

· Rightmove House Prices (Sep) M/M -1.1% vs. Prev. -1.7%

· Rightmove House Prices (Sep) Y/Y 2.6% vs. Prev. 4.3% (RTRS)

Maturity

2.000

5.000

10.000

30.000

Gilt (Dec 10)

Level

0.704

1.802

3.140

4.154

122.36

Change (bps)

0.448

1.332

1.669

1.411

-0.13

Click to enlarge

EQUITIES

European bourses traded in positive territory throughout the European session amid general risk-appetite, with markets largely ignoring Eurozone debt fears. FTSE 100 index outperformed its European peers on the back of strength in BP’s shares following news that co. has permanently sealed the Macondo 252 well in the Gulf of Mexico. Vodafone (NASDAQ:VOD) shares also performed well following news that the company is in secret talks with Verizon (NYSE:VZ) over dividends from the company’s 45% stake in the Verizon Wireless joint venture, which could lead for Vodafone shareholders to receive a GBP 3bln+ dividend windfall. Weakness in the USD index helped commodities, which in turn resulted in basic materials as one of the best performing sectors. Moving into the North American open, European equities have maintained strength with consumer goods and basic materials being the best performers.

Index

DAX

CAC

FTSE

EUROSTOXX

SMI

Level

6237.41

3747.56

5568.67

2770.77

6456.23

Change (ticks)

27.65

25.54

60.22

13.40

67.21

Click to enlarge

FX

AUD gained strength across the board following comments from RBA’s governor, Stevens, saying that Australia’s central bank stands ready to use interest rates to help manage an expected strong pick-up in the domestic economy in coming months. In other news, the USD index traded in negative territory during the European session, which in turn led EUR/USD to trade higher throughout the session. Also, market talk of a Swiss bank buying in EUR/GBP further strengthened EUR.

Currency

EURUSD

GBPUSD

USDJPY

Level

1.3095

1.5610

85.67

Change (pips)

0.0045

-0.0022

-0.1900

Click to enlarge

COMMMODITIES

WTI crude futures have traded sideways throughout the European session, capped below the USD 74 level.

Oil & Gas News:

  • Kuwait will raise production from its northern oilfields to reach more than 850,000 barrels per day by the end of December.
  • Iraq and Turkey signed an agreement on Sunday extending the operations of a major oil pipeline, which transports about a quarter of Iraqi crude exports.
  • The Enbridge Energy Partners (NYSE:EEP) have restarted oil flows on its Line 6A pipeline linking Canada and the Midwest US, after being offline since a leak on September 9th.

Geopolitical News:

  • Salehi, the head of Iran’s Atomic Energy programme, has said that Iran wants Atomic talks ‘without further delay’, during a speech in Vienna.
  • Iran denied on Sunday that border guards had detained seven U.S. troops, calling the report "unfounded". The semi-official Fars news agency reported yesterday that border guards had detained seven U.S. troops as they tried to illegally enter the Islamic state. The agency later withdrew the story, which had given no source.

Commodity

WTI Nymex

OTC Spot Gold

Level

73.48

1280.9

Change (USD)

-0.18

6.60

Click to enlarge

LOOKING AHEAD

Economic Releases

CDT BST EXP. PREV.

0730

1330

CA Int'l Securities Transactions M/M (Jul)

8.000B

5.389B

0730

1330

CA Wholesale Sales M/M (Jul)

0.5%

-0.3%

0900

1500

US NAHB Housing Mkt. Index M/M (Sep)

14

13

Click to enlarge

Auctions

CDT BST

0800

1400

FR EUR 8bln T-Bill*

1000

1600

US Fed's Outright Treasury Coup. Purch. Sep 2016 - Aug 2020

Click to enlarge

* The French Treasury has not released maturities for this auction

** Notes:

Japanese Market Holiday

Click to enlarge

Prices taken at 1236BST

Disclosure: No position