European and USA equities fell sharply in both the morning and afternoon sessions on Monday whilst the euro and commodities tumbled due to Moody’s Investors Service and Fitch Ratings stating that last week’s summit amongst EU leaders actually achieved very little in order to relieve the pressure on Europe’s struggling sovereign governments…
French President Nicolas Sarkozy continued in his vanguard role as he stated on Monday that the legal basis for the new fiscal accord, created to enforce debt and deficit rules in the 17-nation euro area with quasi-automatic sanctions and intrusive powers to reject national budgets, would be finalised before Xmas.
Sarkozy told newspaper Le Monde in an interview;
In the next fortnight, we will put together the legal content of our agreement. The aim is to have a treaty by March. You have to understand this is the birth of a different Europe, the Europe of the euro zone, in which the watchwords will be the convergence of economies, budget rules and fiscal policy.
Sarkozy has also begun to prepare French voters and the markets for what appears to be the inevitable downgrading of the country’s AAA credit rating, however countering the inevitability Sarkozy is insisting that he can cut the deficit without cutting civil servants salaries and pensions.
Moody’s Investors Service reported that it still it intends to follow through on its threat of last week to review the ratings of all 27 members of the European Union in the first quarter of 2012 given that EU leaders offered “few new measures” to resolve the crisis at their summit on Friday. Fitch Ratings mirrored this intention suggesting that the summit failed to provide a “comprehensive” solution to the crisis, therefore increasing the short-term pressure on euro zone sovereign ratings. Standard & Poor’s, which warned last week of a possible downgrade of 15 euro zone countries shortly after the summit, has yet to announce a decision or issue an ultimatum.
S&P’s chief European economist, Jean-Michel Six, told a conference in Tel Aviv: “Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side.”
If any (or a few) of the euro zone’s AAA rated members are downgraded, the quality of the euro zone’s rescue fund would be brought into question and without much doubt would likely suffer a similar fate.
Traders reported that the ECB once again intervened in arguably clandestine ways to buy short-term Italian debt after yields on Italian and Spanish debt spiked on Monday. The European central bank revealed on Monday that it did in fact hold back on bond purchases in the week before the EU summit as it raised pressure on the bloc’s leaders to act. It bought just 635 million euros in bonds in the week ip to December 9th compared to 3.66 billion the previous week. However, now the impact of the summit has been nullified the ECB may revert back to its previous buying programme.
Italian 5-year bond yields once again shot up above 7 percent, which is the level generally regarded as the danger level, 10-year yields spiked above 6.8 percent whilst Spanish 10-year yields topped 6 percent.
The euro fell as stocks slid on both sides of the Atlantic as borrowing costs for Italy and Spain rose as investors and speculators weighed up the outcome of last week’s summit that split the European Union, with Britain isolating itself by vetoing treaty change therefore forcing euro zone countries to negotiate a fiscal accord outside the Union.
Friday’s initial market rally quickly petered out due to the legal uncertainty surrounding the new pact and the absence of an unlimited financial backstop for the single currency.
The Standard & Poor’s 500 Index lost 1.5 percent to 1,236.47 at 4 p.m. in New York, the Stoxx Europe 600 Index tumbled 1.9 percent. The euro weakened 1.5 percent to $1.3187 now approaching its 2011 low. The 10-year Italian bond yield increased 20 basis points after earlier surging as much as 43 points. The cost of insuring against default on European government debt approached a record.
Economic calendar releases that may affect market sentiment in the morning session
Tuesday 13 December
09:30 UK – CPI November
09:30 UK – RPI November
10:00 Eurozone – Economic Sentiment Survey Dec
For UK CPI a Bloomberg survey of analysts showed a month-on-month estimate of +0.2% against +0.1% the previous month, and +4.8% year-on-year, versus the previous forecast of +5%. For RPI a Bloomberg survey of analysts predicted a change of +0.2% month-on-month, compared to no month-on-month change last time. The year-on-year figure is expected to be 5.1%, down from 5.4% the previous month.