MACRO MARKETS DAILY - Spain’s rating and Italy BTP auctions
MACRO MARKETS DAILYSpain’s rating and Italy BTP auctions
· S&P downgraded Spain by two notches last night to BBB+ from A, with a negative outlook. Spain is now A3 /BBB+ /A. S&P also rates Italy and Ireland BBB+.
· Given the rating agencies' reaction function and the recent market dynamics (Spanish CDS recently reached its all-time highs above 500bp, although they closed yesterday c.470bp), some form of rating action in coming weeks was not completely unexpected, although it has probably come earlier than expected and the magnitude (two notches) was also greater than market participants expected, especially considering that S&P’s last downgrade was in January.
· The BTP auction will be the other focus today, as the Tesoro taps up to €2.5bn in 2017 and €2.5bn in 2022 BTPs, as well as 2016 and 2019 off-the-runs.
· GBP Rates: Market uncertainty on the real level of economic activity, the degree to which the situation in the Euro area will deteriorate and the surrounding BoE policy-making should keep gilts in their current ranges.
· FX: EUR/USD down on Spain’s ratings cut, whilst BoJ extends it asset purchases by JPY10trn.
· Economics: Personal spending measures in the Euro area are still frail, with the possible exception of France. The Spanish unemployment rate is high, but is still moving north. US Q1 growth numbers should show a similar pace as in the previous quarter, but with a more balanced pattern.