Nordic Reactions on US Downgrade

As expected, the worlds financial markets has been thrown into chaos after the US downgrade friday night. Most stock indicies continue to slide Monday morning as the dollar and treasuries drops and investors are trying to make some kind of sense of the latetst developments – in both the US and the EU. Here’s what the main Nordic banks writes to their clients this morning.

“The downgrade is likely to affect markets negatively over the coming days; however it is uncertain how large the effects will be.”

DnB NOR Markets


“It is reasonable to expect further stock market declines today after it was known Friday evening that the rating agency S&P had downgraded the US credit rating, from AAA to AA+. S&P say the downgrade reflects their opinion that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than they had envisioned. It is clear that they are not impressed with the way the US politicians handled the raising of the US debt ceiling. This may get US policy makers to tighten fiscal policy further which again will be negative for US growth and further raise fears of a new recession in the US,” Norway’s leading bank, DNB NOR writes. 

Analyst Camilla Viland at DnB NOR Markets continues:

“After several disappointing US data released lately, the labour market figures released on Friday came as a pleasant surprise. US payrolls increased by 117′ persons in June. Consensus had expected an outcome of 85′. Furthermore the payroll figures from May and June were in total revised up by 56′. The unemployment rate fell, from 9.2 to 9.1 per cent. Despite of better than expected figures on Friday, the labour market is still undoubtedly very weak. Still the figures may dampen fears that the US economy is heading into a new recession. The initial market response to the figures was positive. Stock markets rose, treasury prices fell and the oil price climbed. The figures were however not enough to calm markets, which later turned negative again. International stock markets ended yet another day down.”

“It is reasonable to expect further stock market declines today after it was known Friday evening that the rating agency S&P had downgraded the US credit rating, from AAA to AA+. S& P say the downgrade reflects their opinion that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than they had envisioned. It is clear that they are not impressed with the way the US politicians handled the raising of the US debt ceiling. This may get US policy makers to tighten fiscal policy further which again will be negative for US growth and further raise fears of a new recession in the US.”

“The downgrade is likely to affect markets negatively over the coming days; however it is uncertain how large the effects will be. A downgrade from S&P was more or less anticipated and at the same time the US still has the top rating at the two other leading rating agencies, Moody’s and Fitch. The effect on US Treasury yields may go in both directions. On the one had a credit rating downgrade normally would give higher interest rates. On the other hand US treasuries are still likely to be perceived as relatively “safe” and there are few other good alternatives. Thus continued market turmoil may keep the demand for US Treasuries high, and thus the yields low. Another possible effect may be increased demand for Norwegian government bonds, which is perceived as one of the safest assets one may own,” DnB NOR writes in today’s morning report.

Here’s the full report: DnB NOR Markets. Morning Report. US Downgrade.

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Danske Markets:

Here’s what Denmarks main bank writes:

“Downgrade adds to uncertainty – will weigh more on equities The downgrade of US debt comes at a very critical time for financial markets. The market tensions are already very high following last week‟s disappointment that ECB would not buy Spanish and Italian bonds to help reining in recent sharp rises in bond yields of these countries.”

“Last night ECB released a statement that indicates that ECB might start buying Italian and maybe also Spanish bonds. “It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro are.”.This statement was released following a conference call last night for the euro area central bank governors. Neither Italy nor Spain are mentioned specifically when referring to the SMP, but that would also break with the ECB tradition. As we wrote last week (see Markets in turmoil – expect strong policy reaction soon), we expect the ECB will begin purchasing Italian and Spanish bonds if the pressure increases further. It is our expectation that this will happen today. Given the reaction we saw in May 2010, we should be in for a significant spread compression between the periphery and core-EU.”

“Given the risk of increased financial turmoil as markets open today, there has been a number of emergency conference calls among G20 and G7 finance ministers as well as ECB. The French President Sarkozy and German Chancellor Merkel issued a statement to their parliaments to speed up the process of implementing the expansion of the EFSF.”

Here’s the full report from Danske Markets: Danske Markets. Flash Comment. US Downgrade.

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Danske Markets. Flash Comment. ECB expected to start buying Italy today.

Sweden’s SEB writes:

“The austerity package amounting to 2400$ was not enough and late on Friday S&P lowered the rating for US long term debt. According to S&P it is especially increased political uncertainty that motivate the downgrade as it will make it extremely difficult to agree on the measures needed to stabilize debt. The lower rating is firstly a message to the US politicians that they have to put party politics aside and agree on a program for medium term measures to prevent debt from running out of control. Due to the recent financial market turbulence the G7 countries agreed to closely monitor developments and take appropriate measure to ensure stability. This means that interventions in FX markets to prevent some currencies from appreciating to far are probable and possibly also concerted central bank actions. In a press release ECB says that it is possible it will buy more bonds, which most likely will include Spanish and Italian bonds.”

 

“S&P’s decision to lower the US credit rating is unlikely to have any dramatic short or medium term effects on long US bond yields. Despite negative reactions from especially China, there still are few alternatives to US Treasuries at the moment. Still, US woes are likely to render investors more actively seeking diversifying opportunities. Over longer term, US borrowing cost may be expected to increase if the US doesn’t succeed in stabilising its debt situation. The lower rating may be expected to have spill-over effects on GSE’s like Fannie Mae and Freddie Mac with higher financing cost and mortgage rates as a result. Regarding the dollar, while the lowered credit rating is negative for the dollar, it also depresses risk appetite, which in turn tends to be dollar positive. Therefore, we don’t expect any major near term dollar effects. Given the situation in EMU, investors are likely to seek diversifying opportunities in CHF and JPY and several commodity currencies, Scandies and Asian currencies.”

Full report here: SEB. Nordic Alert.

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SEB. Emerging Alert.

SEB: Speculative Positions.

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