Ratings agency Fitch warns the USA on debt ceiling countdown and the ECB regarding banks’ stress tests

Feb 6 • Morning Roll Call • 2054 Views • Comments Off on Ratings agency Fitch warns the USA on debt ceiling countdown and the ECB regarding banks’ stress tests

shutterstock_125705801Just as the UK appeared to be clawing itself slowly from a deep recession, fresh data, delivered on what appears to be a daily basis, is throwing into question the accepted wisdom that the UK is straining at the leash to leave its recent darker days behind. The latest concern, which didn’t flag up as a high impact news event, was a report from the UK’s IFS, (Institute of Fiscal Studies) suggesting that the UK government’s finance targets have been violated and as a consequence the UK’s deficit and GDP versus national debt targets will be missed and missed by some distance.

The ratings agency Fitch was also in the news on Wednesday, but hadn’t been flagged as high or medium impact news. Firstly it reported on Europe’s banks, quite a timely consideration given the suggestion that European banks are overly exposed to the emerging markets crisis. Fitch believes that Europe’s banks need to raise more capital after the latest stress tests and presumably the only reserves will come from shareholder ‘bail-ins’ versus the ECB bailing out those who fail the tests. The ratings agency said:

The European Banking Authority has raised the capital hurdle for its European-wide bank stress test this year, but the robustness of the exercise will depend on final methodology and scenarios, and how regulators apply certain discretions.

We expect additional capital needs to emerge from the stress test, but these are impossible to quantify at this stage. Banks across northern Europe should be able to address capital needs from internal sources, while banks with shortfalls in the more stressed environments of southern Europe may need to turn to external markets and more meaningful deleveraging through asset sales.

Fitch then moved onto the impending USA debt crisis which the majority of market commentators and analysts expect to be resolved at the last hour. Presumably Treasury Secretary Lew only has to have his traditional quiet work with his Republican lawmakers explaining that “if you don’t get it sorted the DJIA will collapse by 2,000 points taking your savings with it” and the matter will be closed. He could add that the timing isn’t great due to the emerging nations crisis and the taper looking as if it may hit investments hard. Fitch ratings said;

We expect the debt ceiling will be raised (or suspended) before the Treasury exhausts its borrowing capacity. Timely resolution of the debt limit is necessary to avoid immediate uncertainties about the Treasury’s ability to remain current on its obligations, including payments on Treasury securities.

If the debt ceiling is not raised or suspended again from 8 February then the Treasury would have to deploy extraordinary measures to access new funding. However, these would buy only limited time before the Treasury runs out of new borrowing capacity (though it can continue to roll-over maturing debt). This so-called ‘X date’ would be comparable to 17 October in the previous crisis.

UK still not half way on planned spending cuts – IFS

The financial crisis and associated recession led to a significant deterioration in the outlook for the UK’s public finances. We estimate, based on official forecasts that this worsening amounts to 8.6% of national income. This picture was broadly unchanged by the Office for Budget Responsibility (OBR)’s December 2013 forecasts, despite upwards revisions to growth in the near term. Borrowing this year is forecast by the OBR to be £111 billion, which is still £51 billion higher than it forecast back in 2010.

January 2014 Non-Manufacturing ISM Report On Business

Economic activity in the non-manufacturing sector grew in January for the 48th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business. The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® Non-Manufacturing Business Survey Committee. “The NMI registered 54 percent in January, 1 percentage point higher than the seasonally adjusted reading of 53 percent registered in December. The Non-Manufacturing Business Activity Index increased to 56.3 percent, which is 2 percentage points higher.

Sharpest rise in U.S. service sector output for four months

Robust expansion of services business activity despite slower rise in new work during January Service providers’ business expectations hit three-year high At 56.7 in January, up from 55.7 in December, the seasonally adjusted final Markit U.S. Services PMI™ Business Activity Index 1 Business Activity Index posted above the neutral 50.0 value for the third successive month. Moreover, the latest reading indicated a robust pace of output expansion that was the steepest since September 2013. The index was also above the average seen since the series began over four years ago (55.5).

ADP: Private Sector Employment Increased by 175,000 Jobs in January

Goods-producing employment rose by 16,000 jobs in January, down from a downwardly -revised figure of 50,000 in December. Nearly all of the growth came from the construction industry which added 25,000 jobs over the month; this followed increases of 30,000 and 32,000 in the prior two months. Manufacturing lost jobs in January; the decline of 12,000 followed a revised gain of 16,000 in the prior month and was the first decline in industry payrolls since July 2013. Service-providing industries added 160,000 jobs in January, down from an upwardly-revised December figure of 177,000.

Fitch – US debt limit is now on the agenda again

New dates and deadlines for agreeing a revised US federal government debt limit are back in focus and will be a key driver for resolving the Rating Watch Negative (RWN) Fitch assigned to the ‘AAA’ US sovereign rating on 15 October 2013. The debt limit – the maximum amount of debt the federal government can issue to the public and other federal agencies – was suspended on 17 October 2013 until 7 February 2014, as a short-term fix to the debt ceiling crisis in October. On 8 February 2014, the limit will be reset at the level of debt at that date. The latest figure for the amount of debt subject to the limit is USD17.3trn.

Market overview at 10:00 PM UK time February 5th

The DJIA closed down 0.03% at 15,440 the SPX down 0.20% and the NASDAQ down 0.50%. The euro STOXX index closed flat, CAC up 0.01%, DAX down 0.13% and FTSE up 0.13%. NYMEX WTI oil closed up 0.16% on the day at $97.35 per barrel, NYMEX nat gas down 5% at $5.11 per therm. COMEX gold closed the day up 0.58% at $1258.40 per ounce with silver up 1.97% at $19.80 per ounce.

Looking towards the equity index futures the DJIA is up at the item of writing (10:00am UK time February 5th) by 0.19%, SPX future is up 0.05%, NASDAQ future is down 0.20%. Euro STOXX is flat, DAX down 0.15%, CAC up 0.17%, FTSE up 0.43%.

Forex focus

The dollar fell 0.2 percent to 101.40 yen mid-afternoon New York time and touched 100.80. It fell to 100.78 on Feb. 3rd; the least since Nov. 21st. Japan’s currency climbed 0.1 percent to 137.23 against the euro after appreciating to 136.23 yesterday, the strongest since Nov. 22nd. Europe’s common currency gained 0.1 percent to $1.3532.

The Bloomberg Dollar Spot Index decreased 0.1 percent to 1,027.22, falling for a third day. The index tracks the value of the greenback against its major peers, including the euro, the yen and the Canadian dollar. The dollar dropped to almost a three-month low against the yen as reports on company employment and service-industries growth showed mixed results, underscoring the economy’s uneven recovery.

The euro traded at almost a 10-week low versus Japan’s currency as retail sales in the region slumped and amid speculation the European Central Bank will hold down interest rates. Argentina’s peso gained the most among emerging-market currencies after the central bank placed limits on the amount of foreign currency commercial banks can hold. The U.S. non-farm payrolls report is due Feb. 7th.

Bonds briefing

Ten-year yields rose three basis points, or 0.03 percentage point, to 2.66 percent at mid-afternoon in New York after falling three basis points earlier to 2.60 percent. The yields touched 2.57 percent Feb. 3rd, the least since Nov. 1st. The price of the 2.75 percent security maturing in November 2023 dropped 9/32, or $2.81 per $1,000 face amount, to 101 3/4.

Thirty-year bond yields increased four basis points to 3.64 percent after reaching 3.52 percent Feb. 3rd, the lowest level since July 5th. Treasuries dropped for a second day before government data on Feb. 7th that’s forecast to show non-farm payrolls increased in January, boosting the case for the Federal Reserve to keep cutting bond-buying.

Germany’s 10-year yield slid one basis point, or 0.01 percentage point, to 1.64 percent at 4:30 p.m. London time, after slipping to 1.60 percent, the lowest since Aug. 1st. The 1.75 percent bund maturing in February 2024 rose 0.105, or 1.05 euros per 1,000-euro face amount, to 101.02.

German government bonds rose, pushing 10-year yields to a six-month low, as a report showing euro-area retail sales fell more than economists predicted buoyed the case for more European Central Bank stimulus.

Italian and Spanish 10-year government bonds gained for the first time in three days as indexes of services in those countries exceeded initial estimates. Germany auctioned 3.3 billion euros ($4.47 billion) of five-year notes today. Greek 10-year yields had the biggest decline in almost a month as the European Union was said to weigh extending the length of the nation’s rescue loans.

Fundamental policy decisions and high impact news events that may affect sentiment on February 6th

Thursday Germany’s factory orders are expected to come in up 0.3%, retail PMI for Europe will be published, which is expected to come in at a similar figure to the previous month’s 47.7. France will be conducting a ten year bond auction. The UK’s base interest rate is expected to remain at 0.5%, whilst the asset purchase scheme will not be increased from the current £375 bn when the UK’s BoE MPC meet on Thursday at noon UK time. This will be accompanied by a statement from the BoE MPC. The ECB will publish its rate setting decision on Thursday and thereafter a press conference will be held to explain the decisions.

The Challenger jobs cuts from the USA fell by over 5% last month, investors will be looking at this print for clues as to how the NFP print will be on Friday. Canada’s trade balance is expected in positive at one billion, whilst its Ivey PMI is expected in at 51.3. The USA trade balance is expected in at -$35.8 for the month. Unemployment claims for the USA are expected in at 334K. Non-farm productivity is expected in at 2.6%, whilst labour costs are expected to have fallen by 0.5% for the month. Finally the RBA will give its monetary policy statement.

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