Things took a turn for the worse in Europe overnight with Standard & Poor’s cutting the Greek sovereign rating by 3 notches to CCC, just 2 away from default, while maintaining a negative outlook. This downgrade establishes Greece at the lowest level of any rated country with the agency citing efforts being made by Athens to bridge its funding gap as likely to culminate in ‘one or more defaults’ as the reason for the move. Once again, the differences of opinion between the ECB and the German Ministry of Finance over the repercussions of involving the private sector in the ‘re-financing’ of maturing Greek debt leaves the market extremely nervous. Yields on peripheral Eurozone bonds have been dragged higher again by the increased cost of Greek borrowing. These market reactions have provoked immediate comment from EU officials with Oli Rehn claiming that he is ‘confident that the Greece solution will be achieved by the end of June’ while the ECB’s Noyer says that ‘we must absolutely avoid anything that leads to declaration of default in Greece’.
All very negative for the Eurozone and yet the Euro itself retains its poise and in fact has gained strength versus both the Dollar and Yen overnight. A lot of this is due to the strong economic data that emerged from China this morning with inflation up yet again to a 3 year high of 5.5% year-on-year, amidst buoyant retail sales and industrial production statistics. The upturn in risk appetite was immediate with the Dollar sharply lower and equities trading at better levels.
Today all eyes must be on developments surrounding Greece with knee-jerk reaction likely on comments that are bound to be forthcoming during the European trading sessions.
There is life elsewhere however and following the release of the RICS housing survey overnight, attention in the UK this morning shifted to the May inflation data. The figures all came in just under analyst’s expectations with the annual rate of CPI inflation at 4.5%. The marginally lower numbers are likely to be a temporary decrease however, as the increase in utility tariffs in the coming months could potentially push CPI inflation above 5% sometime during the 3rd Quarter of the year. Adding to this perception were comments from MPC member Martin Weale in a speech last evening during which he underlined his hawkish credentials. He stated that he still considers an immediate rise in UK rates to affirm the BoE’s commitment to the 2% inflation target to be appropriate. Next month’s meeting looks set to follow a similar pattern to the previous half dozen, with 3 members voting for a small increase in rates whilst the majority of members will remain more concerned over the lack of growth in the economy and claiming that the current inflation bubble is very transitory and will drop out of the economy quickly. This whole inflation scenario is well established in Sterling’s value now and therefore should have little effect on FX rates.
Elsewhere this morning, Japan left rates unchanged again and in fact added further liquidity via a new loan programme worth Yen 500 billion. The Yen eased slightly.
We are due to get some US data this afternoon (PPI and retail sales) which ought to provide further insight into the economic recovery prospects. Given recent releases, I would expect more reaction from less buoyant numbers than the market is looking for, and hence a stronger Dollar at the end of the day.
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