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The markets remain very illiquid but reasonably volatile. Equities had a strong day with oil perking up ahead of expected positive revisions to today’s GDP numbers from the US and the UK. In fact the UK GDP came in lower than forecast at -0.2%- this disappointed the markets and sterling fell against the major currencies and briefly dipped under the key 1.60 level against the USD. The US figure should not be much different from the previous estimate of +2.8% leaving the afternoon session very subdued.

No data yesterday so ‘the trend did indeed prove to be the friend’ and the trend remained Euro negative in the short term albeit not as strongly negative as in the past few sessions. Perhaps the SNB massaging the Euro/CHF cross back up towards the 1.50 level convinced the market not to push too hard. I would however, expect to see the Euro dip again prior to the weekend. Further warnings on the health of Banks worldwide with, following on the news that the FDIC in the US are continuing the culling of disabled institutions (with a further 7 banks shut down over the weekend), a stark warning from the ECB member Stark that we must expect further Bank write-downs in the months to come.

Standard & Poor’s also joined in by warning that the problems at UK banks will hold back the country’s economic recovery by they having no option but to reduce their debt, which “will lead to an elevated rate of loan losses for the next 2-years (and) will weigh on the growth prospects for the UK relative to many other large, mature market economies”. In conjunction with this assessment the ratings agency also cut the collective rating for UK banks, BICRA (banking industry country risk assessment) from 2 to 3. All in all not good news but in reality, old news.

The market is now much more focussed on sovereign risk rather than individual sectors and therefore largely ignored the news. On the sovereign risk front, Moody’s followed Fitch and S&P in downgrading Greece from A1 to A2 and left the outlook on negative. Although Moody’s emphasise that Greece are unlikely to experience any short term liquidity problems, they argue that the long-term risks have been only partly offset by the government’s announced policy changes. They add that problems in Greece do NOT represent a vital test for the Eurozone’s future.

Discuss on this on the Currency Exchange Forum