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Bullish sentiment after Ireland formally applied for external funding proved to be short-lived. Investors turned risk-averse again later in the day as Moody's warned that it may downgrade the country's credit rating by multiple notches and the Green Party called for a general election in January. Worries about contagion remained with Spanish and Portuguese CDS widening. Oil prices fluctuated a lot. The front-month contract for WTI crude oil recovered to 82.87 ahead of the US session. Selling pressures then emerged and sent price to as low as 80.68 before settling at 81.74, down -0.29%. Gold trading was also volatile but price changed little at close. The benchmark contract for the yellow metal settled at 1357.8, up +0. 41%.
Although Irish government's request for financial assistance has been agreed and welcomed by European finance ministers, Moody's worried that the funding will 'will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign's debt burden'. Moody's warned that a multi-notch downgrade is 'now the most likely outcome' as the country's debt has exceeded what was expected in October when the agency put Ireland's Aa2 rating on review. Both S&P and Fitch Ratings have ratings of AA- on Ireland.
Worse still, Ireland is also in political turmoil as the Green Party, the coalition partner, called for an election in January. The call was met as Irish PM Cowen announced that he will dissolve Parliament in January. The uncertainty is that if the 4-year fiscal plan, to be announced on December 7, will satisfy the requirements for EU/ECB/IMF support. Indeed, we believe the fiscal plan will be austere enough to secure the rescue program. However, the overhang could dampen market sentiment.
US data were sparse yesterday and failed to catch attention. What's worth mentioning is Minneapolis Fed President Narayana Kocherlakota's speech. Kocherlakota showed his support for Fed's $600B asset-buying program and said concerns about USD depreciation and asset bubbles were 'misplaced for 2 reasons…'First, the Fed has several tools with which to combat incipient inflationary pressures. Second, in recent public statements, Chairman Ben Bernanke has explicitly and firmly committed the FOMC to maintaining low inflation.
Concerning the commodity currencies we follow, NZD was the obvious underperformer. NZD lost -0.9% against USD, compared with -0.2% and -0.1% for CAD and AUD respectively. The main reason was that S&P had revised country's outlook to 'negative' from 'stable' with foreign currency rating staying at AA+. S&P stated that the revision reflects 'our recognition of the risks stemming from New Zealand's projected widening external imbalances in the context of the country's weakened fiscal flexibility'.
While macroeconomic developments remain under the spotlight, fundamentals for commodities take a backseat. Looking ahead, the US government will publish the second released for 3Q10 GDP which is probably revised higher to +2.4% (annualized) from +2%. The FOMC minutes for the November meeting will also be released.
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