- Moody’s publishes its review of 15 global banks.
- Independent audits say that Spanish banks need up to EUR62bn in extra capital.
- IMF’s Lagarde challenges Berlin by calling for ECB bond buying and direct injection of capital into troubled banks.
The negative financial sentiment intensified in the US session and the three US major equity indices closed between 2.0% and 2.4% lower. Commodities continued to tumble with Brent crude oil prices falling below USD 90 a barrel for the first time since 2010. The market dropped on the ongoing debt crisis and rising concerns that global slowdown has deepened after very weak European and Chinese PMIs were released during the European and Asian sessions.
After the US close Moody’s published its rating changes for 15 global banks. Note that Moody’s had warned the market about the announcement earlier in the day. Moody’s lowered credit ratings by one to three notches to reflect the risk that global banks face from volatile capital market activities. Morgan Stanley, one of the most closely watched firms in the review, had its long-term debt rating lowered by “just” two notches, one level less than feared, sending its stock higher in US after-hours trading. Credit Suisse - as the only global bank - suffered a three-notch downgrade, which was more than expected but note that its new A1 deposit and senior debt ratings still rank higher than many of its competitors.
Yesterday the independent audits from Roland Berger and Oliver Wyman on the need for extra capital in the Spanish banking sector were published. The audits say that Spanish banks would need between EUR 51-62bn in extra capital to withstand a serious downturn in the economy and new losses. According to the audits Spain’s three biggest banks would not need capital even in the stress scenario. Hence, as Bank of Spain already underlined, the EUR 100bn offered to Spain two weeks ago would give a wide margin of error.
Today the preparations for the 28-29 June EU summit will continue. In an interesting FT article IMF’s Christine Lagarde challenges Merkel’s approach to the problems in the eurozone. She says that eurozone leaders need to consider the resumption of bond buying by the ECB and should consider pumping bailout money directly into teetering banks. She adds that the IMF is concerned about “additional tension and acute stress.” Lagarde also calls for a eurozone fiscal and banking union in the longer term and a “gradual but limited” mutualisation of eurozone sovereign debt.
The spike in risk aversion has pushed US yields lower and EUR/USD has fallen to 1.2550 after trading close to 1.27 yesterday afternoon. Euro debt crisis and global growth concerns are in general supporting the US dollar at the moment.
Global Daily
Focus today: Political events will continue to dominate the calendar today. Merkel, Hollande, Monti and Rajoy will meet in Rome to prepare for the EU summit on 28-29 June. Today’s only important data release is the German IFO index. We look for a drop from 106.9 to 105.0, which is slightly below consensus expectations.
Fixed income markets: With a light calendar and no issuance today, interest rates will most likely take direction from the general risk sentiment today. There have only been minor fluctuations over the past 24 hours and it seems like today could be a day with mainly sideways trading. Data Thursday showed that Germany is also feeling the pain from the slowdown in Europe, which did not affect Bunds much, while Gilts seem supported by speculation that the BoE might restart the QE programme next month. Accordingly the 10Y Gilt-Bund spread can decline further.
FX markets: Despite the drop in global equities and commodities both the Norwegian and the Swedish krone have been well supported the past 24 hours. EUR/NOK and EUR/SEK have fallen to 8.80 and 7.47 respectively, underlining our long-held view that the Scandies will trade on “quality” rather than “risk and cyclicality” this year. We see no reason why the performance should not continue the next couple of weeks.
Currently, we have a very negative cocktail for the euro. The debt crisis continues to unfold but contrary to a few months ago it takes place in a much weaker global macroeconomic environment. As always - when global slowdown fears intensify - the US dollar is the preferred currency for scared investors. We doubt the political events today will do little to change the outlook for EUR/USD and see further downside for the cross today. Our below-consensus forecast for the German IFO could also add to euro woes.
Note that the oil price is at the lowest level since 2010, adding pressure to commodity currencies. The short-term outlook for oil is very bearish and new price setbacks cannot be ruled out. If oil prices continue to slide it might eventually weigh on NOK but for now we expect “quality” to dominate.
Scandi Daily
No major data releases in Scandinavia today.
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