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Broadgate: Market News 14/6

14 June 2012

Spain’s credit rating was downgraded three steps by Moody’s Investors Service, citing the nation’s increased debt burden, weakening economy and limited access to capital markets.

The country was cut to Baa3 from A3 and is on review for further downgrade as it plans to borrow 100 billion euros ($126 billion) from European Union rescue funds to recapitalize its banking system, adding to the government’s debt load, New York- based Moody’s said today in a statement. Spanish Prime Minister Mariano Rajoy requested the rescue on June 9.

The key reason for the downgrade “is obviously the need of Spain’s government to ask for external help,” Kathrin Muehlbronner, a London-based senior analyst with the sovereign group at Moody’s, said in a telephone interview. “In our view, that’s not a sign of strength, it’s a sign of weakness.”

Spain’s ratio of debt to gross domestic product is expected to rise to more than 90 percent by the end of the year, from less than 40 percent in 2007, she said. The country’s ranking is one level above junk, or speculative-grade. Moody’s said it will likely finish its rating review within a maximum of three months.

“One of the key reasons the rating is so close to the non- investment-grade category is we do see an increasing risk that the Spanish government will have to seek further aid,” Muehlbronner said.

Yields on Spanish debt due in 10-years climbed to 6.75 percent today, compared with 5.1 percent at the end of last year.

“The Spanish government has very limited financial market access,” Moody’s said in the statement, citing the nation’s need for rescue funds and “its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the” European Central Bank.

Wall Street ended lower on Wednesday as fears ahead of the weekend elections in Greece finally drove down a market that had been treading water through most of the day. Up to 800 million euros ($1 billion) have been pulled out of Greek banks daily ahead of the cliffhanger election on Sunday, which many fear will result in Greece leaving the euro zone. If that happens, investors fear other peripheral nations may also have to exit.

The euro zone’s cloudy future has made investors inclined to quickly reverse positions. On Wednesday, they pounded shares in financial, energy and materials sectors into the close.

Volume surged after three weak sessions. About 7.1 billion share trade on the NYSE, Amex and Nasdaq, slightly above the 20-day moving average.

There’s a “lack of details or specifics coming out of Europe, and that creates more of a vicious cycle,” said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston. “The euro has been a concern every single day.”

Also weighing on sentiment, the government reported U.S. retail sales fell in May to their worst level in two years, the latest data to point to sluggish U.S. growth after a weaker-than-expected U.S. jobs report in May sparked widespread fears of a slowdown. The S&P Retail Index lost 1.5 percent.

There was a defensive tilt to trading for much of the day as gains in sectors such as healthcare and telecoms managed for a time to offset declines in cyclical areas. Shares in telecom provider AT&T hit a 52-week high at $35.06, before closing unchanged at $34.98. The telecom sector ticked up 0.1 percent.

Shares of JPMorgan Chase & Co were a standout, rising 1.6 percent as the bank’s chief executive, Jamie Dimon, defended the portfolio behind JPMorgan’s recent multibillion-dollar trading loss, telling lawmakers it was a genuine hedge that would make the firm a lot of money if a credit crisis hit.

In the overall market, the Dow Jones industrial average fell 77.42 points, or 0.62 percent, at 12,496.38. The Standard & Poor’s 500 Index lost 9.30 points, or 0.70 percent, at 1,314.88. The Nasdaq Composite Index dropped 24.46 points, or 0.86 percent, at 2,818.61.

The S&P 500 had moved more than 1 percent in opposite directions on the previous two trading days, which were largely dictated by the events in the euro zone.

On Tuesday the index bounced after falling toward the 1,300 level, a psychological milestone that some traders are using to trade against as index levels assume more importance given the lack of a clear outlook.

Investors have pushed Spain’s 10-year borrowing costs to their highest level since the launch of the euro in 1999, adding to uncertainty over the plan to bail out the country’s struggling banks.

In company news, Dell Inc, the No. 2 U.S. PC maker, said it aims to raise its target on dividends and share buybacks to 20 to 35 percent of free cash flow, saying its corporate software and services business is on track to grow by an average of 10 percent annually until 2016. Its shares advanced 2.5 percent to $12.27.

An influential government adviser in China was quoted as saying the country’s economic growth could fall below 7 percent in the second quarter if weak activity persists in June.

Investors have been looking to China’s relatively robust expansion to pick up the slack from Europe, especially demand for commodities.

Also on Wednesday, shares of Celgene Corp rose 0.8 percent to $63.59 after the biotechnology company authorized a stock buyback program of $2.5 billion.

Commodities

Oil for July delivery was at $82.76 a barrel, up 14 cents, in electronic trading on the New York Mercantile Exchange at 1:20 p.m. Sydney time. The contract fell 0.8 percent yesterday to $82.62, the lowest close since Oct. 6. Prices are down 16 percent this year.

Brent oil for July settlement, which expires today, gained 26 cents to $97.39 a barrel on the London-based ICE Futures Europe exchange. The more-actively traded August future rose 11 cents to $96.83. The European benchmark contract’s premium to West Texas Intermediate was at $14.63, from $14.51 yesterday.

Spot gold traded up $1.37 to $1,618.39 an ounce by 0328 GMT, after rising nearly 2 percent over the past four sessions, its longest winning streak since late April. The U.S. gold futures contract for August delivery was little changed at $1,619.70.

The inverse correlation between gold and the dollar stood at -0.275, close to an eight-month high of -0.236 hit last week. A reading of -1 suggests perfect inverse correlation, that is, gold and the dollar move in opposite directions.

Currencies

The dollar traded at $1.2571 per euro as of 12:44 p.m. in Tokyo after falling 0.4 percent to $1.2557 in New York yesterday. The greenback was little changed at 79.43 yen. The 17-nation euro was at 99.85 yen following a 0.7 percent advance in the previous two days to 99.80. The common currency touched 95.60 on June 1, the lowest since November 2000.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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