Intraday Market Thoughts

Downgrades Continue, All Eyes on Chinese Inflation

by Adam Button
Oct 14, 2011 1:38

Sovereign and banking downgrades capped the recent risk rally on Thursday. This time it was Spain. JPY was the top performer while CAD lagged; the risk aversion trade is continuing in Asia. The Chinese CPI report is the highlight of the upcoming session. Ashraf's Premium trades have been delayed and will be on release shortly.

Positive sentiment abated for the first time this week after Fitch took aim at banks around the world. UBS, Lloyds and RBS were downgraded one or two notches and 7 other global banking giants were also placed on creditwatch negative. Fitch was also forced to quash a widespread rumour of a UK downgrade.

Not to be outdone, S&P later cut Spain to AA- from AA and said the outlook remains negative. This brings S&P in line with Fitch, who downgraded Spain last week. Moodys remains one notch higher at Aa2 but placed Spain on review for a downgrade in July, which points to a cut by the end of the month.

Disappointing earnings at JPMorgan also weighed on sentiment.

The negative news was balanced by the ratification of the EFSF by Slovakias caretaker government -- they were the final nation in the union to do so. In the US, initial jobless claims were 404K compared to the 045K expected

The S&P 500 fell 0.3% to 1203.

The early focus of the Asian session was a survey from Nikkei saying Japanese firms have a combined exposure of $37.3B to the PIIGS nations, including sovereign and private debt. The number is certainly manageable and none of the debt is from Greece. Japans corporate goods price index slid to 2.5% from 2.6% as expected.

China Inflation Preview

Analysts are divided about the likelihood of further Chinese rate hikes but the picture will become clearer after the 21:30 EST (1:30 GMT) release of the September CPI. Expectations are for a decline to 6.1% y/y from 6.2% in Aug and 6.5% in July.

Yesterday, both imports and exports were soft in Chinas trade balance report. This report weighed on sentiment throughout the day and foreshadows soft industrial production (and perhaps GDP) next week.


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