Downgrades pile more pressure on Euro

Downgrades pile more pressure on Euro

S&P downgraded both Greek and Portuguese debt yesterday, as fears over a fiscal crisis in the Eurozone continued to spread. As the market turns it attention away from the Hellenic Republic towards Portugal, two year Greek bonds are now yielding over 13% as investors offload them and worries over how the downgrade will affect ECB collateral requirements (which were only changed a few weeks back to try to stop this happening) take hold. The Euro fell to an 11 month low against the Dollar, the historical safe haven currency, and further falls seem likely and would be very welcome in dealing with the deepening sovereign problems throughout the Eurozone. Some commentators are speculating that the ECB could use its ‘nuclear option’ to help debt stricken countries fund themselves. This involves direct purchases by the Central Bank of Government bonds and is akin to printing money, which would put major downside pressure on the Euro.

Sterling has held on to recent gains against the Euro, trading above the key 1.15 level in spite of the continuing fears over a hung parliament. As more uncertainty grips the market over the Eurozone and risk appetite diminishes, Sterling has fallen against the Dollar towards 1.51 and looks likely to continue on this path in the near term.

Stock markets across the globe declined yesterday as the Senate heard Goldman Sachs testimony about the SEC charges levelled against them relating to a synthetic derivative deal they brokered, casuing large losses for several investors including IKB, a German bank. Traders tried to figure out how the case is likely to affect financial markets moving forward and whether more cases of this kind will be brought against financial firms and the deals they did in the lead up the financial crisis in 2007-2008.

Today, all eyes will be on the FOMC interest rate decision and if there is any change in tone from the current dovish stance towards a more hawkish tone. We also have German and Aussie CPI data along with Canadian house prices later this afternoon.

report by Alistair Cotton

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