French Banks Downgraded By Moody’s, Greek Talks Still To Come

Market sentiment has taken some considerable steps backward overnight, as Moody’s downgraded the credit rating of 2 French banks, emphasizing the fears of debt crisis contagion within Europe. Credit Agricole was cut from Aa1 to Aa2, whilst Société Générale went from Aa2 to Aa3. Adding further worry to the outlook, Chinese PM Wen suggested that developed nations needed to cuts deficits and create jobs, rather than relying on China to bail out the world economy.

Greek state television reports yesterday revealed that Greece’s PM Papandreou would hold a conference call with Merkel and Sarkozy this afternoon, so expect most of the focus to remain on headlines and rumours emerging from those talks. Yesterday’s latest Italian bond auction made for uncomfortable reading; the gross yield on the Sep 2016 issuance was 5.60% - the highest yield achieved since the introduction of the euro. The Italian government remains “optimistic” that Moody’s will not downgrade Italy, but much hinges on whether European growth can recover in the second half of 2011. To do so, we will almost certainly need to see some sort of satisfactory conclusion to the Greek situation, so any new measures or initiatives announced after the Merkel-Sarkozy-Papandreou discussions will be eyed carefully by the financial markets.

As expected, BoE member Posen reiterated his calls for immediate monetary stimulus in his speech yesterday, and focused predominantly on downside risks to growth in both the UK and elsewhere. This bias was unsurprising from the MPC's perennial dove, and markets found little new information to report from his address. Meanwhile, UK CPI came out in line with median forecasts at 0.6% MoM, 4.5% YoY, but the reading had little impact given the MPC’s lack of sensitivity to inflation risk over the past year.

Coming up today we are expecting the UK claimant count to rise to 5.0% from 4.9% last month, but the ILO unemployment rate is expected to remain stable at 7.9%. Also on the docket will be the Eurozone’s July industrial production data, followed up by a busy afternoon of US data that includes PPI, retail sales and business inventories.