Intraday Market Thoughts

S&P Goes First to Downgrade the US

by Adam Button
Aug 6, 2011 14:07

S&P finally follows on its April warning and downgrades US debt rating to AA+ from AAA. Less than 1 week after China's rating agency downgraded the US, S&P is the first of 3 US major agencies to do so. Late Friday's positive developments in Europe helped EUR and GBP along with risk assets, but the S&P downgrade should lead to fresh losses in Monday Asia, especially in USDJPY, USDCHF with fresh gains in gold & silver. Weekly CFTC data showed a rush out of euros with yen longs expanding. You can see Ashraf's Saturday interview telling AlArabiya that gold's inflation-adjusted record stands around $2300.

S&P explained : "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips". S&P made sure to note the lack of tax hikes exacerbated the black hole, stating "It appears that for now, new revenues have dropped down on the menu of policy options."

Ashraf's Saturday interview telling AlArabiya that gold's inflation-adjusted record stands around $2300

On Friday, the S&P500 fell 0.1% to 1199 on Friday but it was a volatile session for risk assets. Sentiment improved after non-farm payrolls beat estimates and the prior was revised higher. On the downside, the participation rate hit a 28-year low. Even if the US can avoid recession, it now appears to have a structural employment problem that will be very difficult to eliminate. The bigger story was the Italys Berlusconi announced accelerated reforms to labour and welfare and will introduce a balanced budget amendment.

The Canadian dollar fell even though Canadas unemployment rate fell to 7.2% from 7.4% as the 7.1K jobs created missed estimates of +28.4K. The report wasnt nearly as bad as advertised because the wind down of government stimulus jobs skewed the numbers. A huge 71K decline in government jobs masked 94.5K new private sector jobs the best performance since April 2000. Statistics Canada noted that youth workers were having difficulty this summer finding work so the drop in the unemployment rate may have been due to students giving up looking as summer winds down rather than real workers giving up.

Another drop in CAD came as Canadas Ivey PMI falls to 46.8 in July from 59.4. Its a large drop but it baffles us that anyone trades around this data point. Its extremely volatile, always trendless and indicative of nothing 9-out-of-10 times.

The Swiss franc was easily the best performer on the week. AUD was the laggard. Crude declined 9.2% on the week. Looking at the charts, there is a substantial weekly reversal in AUD/USD as it fell to the lowest weekly close since late March.

Fridays CFTC commitment of traders report showed net longs in EUR cut down by 90% while JPY longs expanded 16% to the highest since at least Jan 2007. Its important this week to remember that the data covers only through the close on Tuesday. The yen buyers would have been hurt by the BOJ intervention on Wednesday. CHF longs expanded by 61%. Australian dollar positions were scaled back from a near-record high after Tuesdays RBA meeting.


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