Not, exactly, a quiet day yesterday. World equity markets collapsed on a culmination of poor data all across the board.
…and as of this writing:
On the fundamental homefront:
– Every PMI (yes everything) in the following countries/zones fell BELOW expectations:
Spain, France, China, Italy, Germany, the UK, EMU and the ‘not-to-be beat in good or bad times' USA
-Australian GDP missed expectations, coming in at -1.2% vs. exp. -1.0%
-The typically shaky, at best, ADP employment change came in at +38 vs. exp. +177k. As a result we are seeing a range of revisions across the board trickling in from major investment banks, taking their non-farm estimates lower.
-CHF retail sales destroyed annual comparison expectations, acting as a catalyst to even-newer strength in the currency: 7.5% vs exp. 1.9%. The month over month pace grew from 0.7% from 0.4%. EXCLUDING FUEL, it remained unchanged. But no one seemed to care, of course.
-We are still awaiting the final word on a plan for Greece. EUR/USD felt a quick 50 pip retraction from highs on a German paper saying that the IMF will not pay its 5th tranche of aid. ECB instists no restructuring but Moody's didn't seem to be paying attention:
-Moody's comes in and decided to metaphorically punch Greece in the face yet again, downgrading 3 additional notches from B1 to a fresh and well below average Caa1, naturally with ‘outlook negative' (click here to go to Moody's and see all sovereign ratings). The effect pummeled the already “struggling to maintain buoyancy” EUR/USD slightly into the ground, bottoming out just ahead of the 1.4300 handle. This follows Fitch's recent action on May20th, downgrading the country to B+, or 4 levels below junk status.
With this move, Greece snuggles up with Cuba, another country sharing the Caa1 status. Per Fitch, Greece's credit is as good as the nations of Ghana, Vietnam, Venezuela, Cape Verde, Mongolia, Georgia, Kenya, Zambia, Angola, Sri Lanka and Bolivia. Not, I'm sure, what the ECB ever had in mind (nor the people of Greece for that matter).
The main triggers for today's downgrade are as follows:
1. The increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country's highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets.
2. The increased likelihood that Greece's supporters (the IMF, ECB and the EU Commission, together known as the “Troika”) will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.
Taken together, these risks imply at least an even chance of default over the rating horizon. Moody's points out that, over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt service requirements on a timely basis, while around 50% have defaulted.
Greece's Caa1 rating incorporates Moody's assumption that current negotiations between the Greek government and the Troika will result in further official support for the Greek government and the announcement of additional austerity and structural reform measures.
The negative outlook on the Caa1 rating reflects Moody's view that the country's very large debt burden, the significant implementation risks in its structural reform package, and the country's ongoing need for external support skew risks of future rating actions to the downside.
In the graphical world:
-EUR/USD made a top at the confluence zone we discussed yesterday…..spike base, touted orders and 50% retracement confluence.
-USD/CHF and EUR/CHF make all-time fresh lows, again, bringing rise to the cheeseheads (thanks FK, DT). The drive started off with the better-than-expected retail sales report for May
-USD/JPY made a base at the support level we referenced yesterday following the poor ADP result and nail in the coffin ISM. It found the bids. We're currently retracing back down towards that level.
-EUR/JPY spike base held steady, and the pair took at hit from the poor US data. From its peak it is down appx. 200 pips. Yesterday we talked about the horrible circumstance of how close to every analyst on the planet was telling you to buy this and other Yen pairs. This is why people lose money in this business. Too many talking heads that like to run after price. Bad foresight, even worse hindsight.
France, German, Italy, Switzerland are taking a breather today, but the bigger boys are still going to bat. Friday is non-farm. Enough said. Today we are going to be correcting any technical gaps and following the recent shift in price.