Expected Downgrade of Spain by S&P

Junk

The widely expected downgrade by S&P of Spain took place after most of the market had left last night. The rating has been cut to BBB-, one notch above junk and importantly with a negative outlook. Moody’s is due to make a decision within the next month, which could move Spain into sub investment grade and lead to the countries average rating from S&P, Moody’s and Fitch dropping below the watershed.

The IMF gave some breathing room to Athens and Madrid, with Christine Lagardesaying, "It is sometimes better to have a bit more time.....That is what we advocated for Portugal; this is what we advocated for Spain; and this is what we are advocating for Greece." This is in stark contrast to Berlin’s view, German Finance Minister Wolfgang Schaeuble told reporters today, "The IMF has time and again said that high public debt poses a problem......So when there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction......When you want to climb a big mountain and you start climbing down then the mountain will get even higher." Conversely Lagarde blamed the slow pace of fiscal and banking union reform for contributing to the global slowdown.

Basel

In 2010 the G20 agreed that new Basel rules would be implemented at the start of 2013, rumours circulating today claimed European Union representatives and legislators from the European Parliament discussed delaying the deadline by up to one year. Although the Basel Committee on Banking Supervision didn’t announce an extension today, it did admit this week that some countries would miss the original date. European banks have been saying that the final details of the EU’s implementation are vague. Lenders believe that keeping to the original date would drive up costs further.

JEF

The much heralded Joint Economic Forecast Group which contains a number of institutions including Ifo, KOF and IHS Vienna, said today in its Berlin commissioned bi-annual report on Germany, that it was cutting its growth projections for Germany for 2012 and 2013 from 0.9% and 2%, to 0.8% and 1% respectively. Inflation will be 2.1% next year due to ECB loose monetary policy. Unemployment will be unchanged at 6.8%. They said, “Should the situation in the euro zone continue to deteriorate, this will also impact the German economy.....Over the forecasting period as a whole the downside risks prevail and there is a great danger that Germany will fall into a recession.”

Auctioned

Italy issued a total of €6bn 3y, 4y, 6y and 13y BTPS today. The 3y €3.75bn tap b/c was 1.67 (vs 1.68 for previous 4 auction average, it was 17 cts bid through (vs 15 cts for previous 4 auction average). The 4yr was more popular with b/c 2.22 (vs 1.68 for previous 4 auction average). The 6y saw b/s 2.46 (vs 1.51 for previous 4 auction average), 5cts under bid (vs 11cts for previous 4 auction average. Whilst the 13yr b/c was 2.04 (vs 1.64 for previous 4 auction average), being 7cts bid through (vs 17cts for previous 4 auction average). These successful auctions led to the first sustained bid of the week for the BTPS curve, with 2 & 10yr BTPS yields dropping almost 10bps.

The UK DMO sold £1.5bn 2024 inflation (RPI) linked gilts, b/c was 2.56 and average yield was    -0.441%. The 10yr break-even rate widened the most in almost a month. Robert Stheeman, CEO of the DMO said in September that a possible change to the formula used to calculate the RPI has led to increased volatility in the UK Linker market.