The euro remained centre stage yesterday, losing the gains made throughout the day during the overnight Asian markets after credit ratings agency Standard & Poor’s warned the six AAA rated members of the euro zone that their credit ratings could be cut.
The euro had registered gains throughout the day after French President Nicolas Sarkozy and German Chancellor Angela Merkel pledged to tighten fiscal discipline in the euro zone.
S&P has placed Germany, France, the Netherlands, Austria, Finland, and Luxembourg on ‘credit watch’ meaning they have a 50% chance of having their AAA ratings downgraded citing the political and economic turmoil in the euro zone as key factors behind their decision.
Only Greece (whose rating was already at CC categorized as “highly vulnerable, speculative bonds” with a high near-term probability of default) and Cyprus (whose rating was already on review) escaped this ratings action.
S&P expects to complete their review “as soon as possible” following the EU summit on Thursday and Friday and concludes that “we believe that ratings could be lowered by up to one notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments.”
In UK data, the Halifax reported that the UK housing market continued its bumpy ride as prices fell 0.9% between October and November with the underlying trend being negative for the second successive month following three consecutive increases.
In better news for the outlook for the UK economy, the Markit/CIPS service sector purchasing managers’ index for the UK in the month of November come in slightly better than expected at 52.1 points versus 51.3 for October. The UK service sector activity also rose for an eleventh successive month in November but at a modest pace as incoming new business increased at the slowest rate of the year so far. The optimism of the report was tempered by higher utility costs which continue to underpin a strong rate of overall input price inflation, while competitive pressures dampened pricing power, with output charges little changed since September.
Job cuts were recorded for a fourth time in the past five months in November. Although modest, the rate of job shedding was the quickest in 15 months.
Business confidence was slightly down on October’s five-month peak but hopes of an improved economic environment, the 2012 Olympics and the start of new projects were all factors reported to have underpinned positive expectations.
According to Chris Williamson, Chief Economist at Markit, “Whether or not the economy slides into recession next year depends to a large extent on whether politicians can find a workable solution to the euro zone’s crisis. Until then, uncertainty is likely to prevail, which is damaging to both business and consumer confidence and raises the risk of the UK sliding back into a new downturn in the first quarter.”
Overnight the Royal Bank of Australia (RBA) surprised the markets with a cut of 0.25% on its official bbenchmark rate, the second in consecutive months citing the euro zone sovereign debt crisis and a slowdown in Chineese manuafcturibng activity.
Yesterday saw the end of the risk on trading of the previous 5 worjking days as risk aversion once again takes hold.
