World First Morning Update 18th May: Spain Joins The Party As Crisis Deepens

It was only a matter of time until the ratings agencies got involved in the current market turmoil. Risky assets have taken a further leg lower overnight in Asia as Moody’s downgraded 16 Spanish banks, including the big three of Santander, La Caixa and BBVA, as a result of the continual downturn in the country’s economic prospects plus the increase in the sovereign’s bond yields over the past couple of weeks.

This follows rumours that a “run” on the Spanish bank Bankia was taking place with the shares dropping by 30% at one point. This is the bank that had been helped by the Spanish state in recent weeks and although it has been the beneficiary of two ECB LTROs in the past 6 months, fears still remain.

As we said yesterday, we are getting to the kind of pain levels that previously has seen some form of coordinated action from central banks. This may come in the form of the purchase of peripheral bonds in order to lower the exorbitant bond yields, or a promise of further liquidity to banks, or indeed for the sovereigns affected as well. The most likely seems to be the first; whether we see it is another matter.

This could be one of those Fridays when we see a significant shift lower in markets late in the day if a resolution isn’t seen as those investors hoping for a solution throughout the week finally give up and sell their holdings. This situation will be perpetuated through next week unless sentiment is held up following an announcement over the weekend that bolsters confidence.

Even so, sterling has remained on the back foot following the Bank of England’s inflation report and is back to the mid-1.57s vs the US dollar and below 1.25 against the euro. It will remain in reverse gear against the dollar if sentiment refuses to improve in the short term. It has held following comments from MPC member Paul Fisher that there would be no more QE unless there is a crisis. We’re not far off one by all accounts Mr Fisher.

Those who have a tin hat may want to tighten the straps by a couple of notches today.

Latest exchange rates at time of writing