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27 January 2011

Yen Declines on S&P; Downgrade

Written by dslmpartners
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Global equities are mostly higher in the wake of the steady FOMC bond purchases, which helped boost sentiment for stocks. Asian stocks were flat, but positive for the fourth straight day as the MSCI Asia Pacific posted marginal gains (though most markets were already closed before the Japan downgrade). Japan’s Nikkei posted solid gains of 0.7% as well. In Europe, stocks rose for a second day, led by mining companies, with the Euro Stoxx 600 up 0.2%, while Nokia sank 5.1% after net income fell. Spanish stocks advanced for the second straight day with another solid performance in financials. Meanwhile, in the US better than expected earnings kept the markets in the black.


Global bonds are mostly lower as stocks continue to advance. In Europe, Belgian bond yields jumped to the highest in almost two years as the 228-day stalemate continues to prevent the formation of a new government, prompting the risks that the national government will not succeed in tackling the government’s fiscal issues. Likewise, Ireland led gains in the 10-year yield, up 7 basis points, as S&P said its sees Spain, Ireland, Greece and Portugal stuck in a recession, which is likely to exacerbate deficits and thus debt. German bunds were pressured by hawkish comments from ECB board member Bini Smaghi, while Germany awaits national CPI, which is expected to increase to 2%.

S&P cut Japan's sovereign rating one notch to AA-, citing the lack of a coherent fiscal strategy, and the continued heavy tone of the dollar. The S&P downgrade was surprising especially in the timing. The BOJ had increased its growth forecast for the current fiscal year to 3.3% from 2.1% earlier this week and the government had just reported that exports rose in December for the second consecutive month. The 13% year-over-year growth in exports was well above expectations (~9.3%). The downgrade was announced after the close of local markets, but overall the impact may be minimal. Foreign involvement in the world's biggest bond market is minimal - recent data suggests no more than 10%. Moreover, the S&P cut simply brings them in line with Fitch. And when Fitch cut back in May 2009, the dollar rallied for a couple of days and came off. This time, the dollar's gains are considerably more muted, but the yen has been sold on the crosses. On a separate front, note that Japan's exports to the US rose in December, helped by a surge in autos, warning of the risk of some widening of the US trade deficit in December. Japanese exports to China jumped 20% to new record highs. Exports to Europe rose just almost 10%, illustrating the weakness of domestic demand there.