Moody’s confirms triple-A but negative outlook weighs

The US Congress eventually passed the law that raises the debt ceiling and subsequently Moody’s reaffirmed the highest rating for the US government but assigned a negative outlook to it. Importantly, the agency said that a substantial deterioration in economic environment may trigger a downgrade.

Since some investors on Wall Street are just waking up to the reality of a stall in recovery, such perspective looks scary to them and thus the reaction on the markets. The S&P500 futures fell below an important level of 1255 pts. and there is only a support at 1242 pts. to keep the index in consolidation. However, unless the panic is tamed the bulls might find it hard to defend that level.

On the forex, a substantial revision in expectations regarding growth is especially dangerous for the Aussie. The Australian economy is exposed to the global economic cycle and recent strength on commodities (coupled with strong fiscal position) pushed the AUDUSD to all-time highs despite some signals of softening growth at home. The pair failed at a resistance of 1,1050 and subsequently slid to 1,0680 where bulls were able to keep it above the short-term trend line. If the line is broken, the next support is located at 1,0440.

EURCHF – searching for the lows

The Spanish PM postponed his vacations to watch the situation on the markets closely and meet JM Barroso as Italian and Spanih yields keep soaring just ahead of the Spanish auction (3 and 4y for 2,5-3,5 bln EUR). The market is in a panic mode as investors (and politicians alike) have no clue what could be done to reverse this tide and that creates a perfect environment for the hot money to push the franc even higher (especially as major pairs including EURUSD, GBPUSD and even USDJPY are left in the void). 

The reluctance of Swiss authorities to address the currency has played its role as well. Relying on July’s PMI or recent inflation data doesn’t make any sense as those numbers reflect economic reality with the rate around 1,25 not 1,08. However, investors are aware that the SNB is having hard times explaining major losses from currency holdings and that may discourage it from taking actions. Still something needs to change or both: the Southern Europe and Switzerland will be in real troubles.

Events to watch – ADP, ISM services and US fuel inventories

The crisis is back in Europe so it might look as the US data are irrelevant. But it’s not the case – slowdown fears are now a central issue in the fiscal context so the US ADP (8.15 ET, 14.15 CET, consensus +100k) and the ISM services (10.00 ET, 16.00 CET, consensus 53,7 pts.) will need to have an impact on the markets. The market expects oil inventories in US to have risen by 1 mln brls (10.30 ET, 16.30 CET) – so far the oil hasn’t adjust to the reality of a slower economic growth.      

Przemysław Kwiecień PhD, Chief Economist

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