Risk Markets Lower As Moody's Downgraded Spain And Cyprus, Euro In Range

Financial markets continue to stuck in tight range, gaining for a day and losing the other. Any rebound attempt was limited by the worry on Greece election on Sunday. Further than that, sentiments continued to be weighed down by downgrades. This time, Moody's lowered credit ratings of both Spain and Cyprus. Italy's bond auction will be closely watched today, together with job market data from US. Italy will try to sell as much as EUR 4.5b of bonds today, one maturing in February 2019 and the other in March 2020. But unless there are some drastic results, markets will likely continue to stay in range before the week closes.

Moody's downgraded credit ratings of Spain by three notches to Baa3 from A3 as the bailout fund would raise the country's debt burden and it would rather be a "sign of weakness" instead of " a sign of strength." Moreover, the rating agency stated that "the Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years." Currently, Spain's credit rating is only a notch above junk bonds and Moody's said that further downgrade would be likely as there is "an increasing risk of Spain needing to ask for more support in the coming months or in the coming years." Last week, another rating agency, Fitch slashed Spain's sovereign credit rating by three notches to BBB.

Meanwhile, Moody's also downgraded credit rating of Cyprus to BA3 from BA1 and is on review for further downgrade. It noted that it's banking sector is heavily exposed to Greece. And, on occasion of Greece exit, the amount needed for the government to support the sector would be significantly raised. Moody's noted that increased risks for Cypriot banks "may lead to much larger recapitalization costs to the government, and Moody's needs to reflect these in the Cypriot sovereign's ratings." Deputy Europe Minister Andreas Mavroyiannis said yesterday that EUR 1.8b is needed within the next few weeks for bank recapitalization. And if Cyprus choose to seek bailout from EU, a total of around EUR 3-4b would be asked for.

In Greece, the anti-austerity Syriza leader Alexis Tsipras yesterday said yesterday that European leaders will still allow Greece to stay in the euro even if the austerity measures are renegotiated. He is confident that kicking Greece out of euro will be "catastrophic" for the entire euro area. And such a believe is based on analyses of the most credible European and international economists, cost-and-benefit analyses of one or the other scenario. However, some analysts are criticizing Tspiras as promising miracles and misreading some European partners.

The RBNZ left the OCR unchanged at 2.5% in June although it noted that New Zealand's economy has weakened a little since the March MPS. The central bank has postponed its first rate hike from late this year to next but the overall interest rate track is just slightly lower. GDP growth forecasts were lowered this year and as an average over the coming 3 years. Concerning future monetary policy outlook, we believe the RBNZ would keep the door open for further easing if the macroeconomic situation deteriorates further. More in RBNZ Left OCR unchanged but Lowered Growth Outlook.

While is it almost certain that the SNB would leave the policy rate unchanged at today's meeting, the market is eager to know the central bank's stance on defending the currency floor. We expect policymakers would reiterate the commitment to enforce the minimum exchange rate of CHF 1.20 per euro. Amidst the highly uncertain and volatile situation in the eurozone, the SNB's determination is especially important as the lack of which would be interpreted as an invitation for capital inflow and further appreciation of the Swiss franc. More in SNB To Show Determination Of Defending Currency Floor.