Spanish Long-Term Debt & Deposit Ratings Downgraded By Moody's

Global risk sentiment continues to deteriorate as Moody’s downgrades Spanish banks; disappointing US data  EUR/USD and commodity prices drift lower.

The market has received little news to cheer about lately. Yesterday’s headlines were, as usual, dominated by the euro crisis. Moody’s downgraded the long-term debt and deposit ratings for 16 Spanish banks and Santander UK, a UK-based subsidiary of Banco Santander on last week. The large banks, BBVA and Santander, get one notch, while the rest up to three notches – similar to what happened in Italy.

In the US, the mood soured following a sharp drop in the Philly Fed Index, which slid to its lowest level in nine months (-8.2 versus +10 est.). While this index is at odds with other regional surveys and tends to be more volatile, it is still a concern that the employment index is at its weakest level since June 2010. The S&P 500 index was down for a fifth day. The index dropped 1.5% to 1305 – the lowest closing level since January.
 
Bond yields continue to move lower and yield curves flatten further. In Germany and Denmark, two-year government bond yields are very close to zero. In the long end of the curve, German Bunds set another all-time record. In the US, 10-year Treasury yields closed at their lowest closing level on record. There is a growing demand for safe assets and growth fears are rising. Spreads continue to widen in the peripherals.

In the  FX markets, the euro is under pressure against USD and JPY. In the cross currency markets, there is an uptick in the funding costs of getting USD offshore. The Scandi currencies remain volatile, but NOK significantly outperforms SEK as increasing growth global concerns weigh more heavily on the Swedish currency. However, if the oil price continues to drop, growth fears may eventually weigh more heavily on NOK too.

While waiting for the Greek election on 17 June, we are likely to see continued high uncertainty and stress in the markets. Things are likely to get worse before they get better.

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