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Broadgate: Market News 15/6

15 June 2012

Moody’s Investors Service said on Friday it had downgraded five Dutch banks, four of them by two notches, and warned a Greek exit of the euro would see further cuts, kicking off a long-awaited round of downgrades for major European institutions.

Moody’s set a stable outlook to the ratings for four of the groups but kept a negative outlook for ING Bank, meaning it could cut it again.

The downgrades will only add to pressure on European leaders to sort out the region’s debt crisis, with a real test to the union coming this weekend as Greeks go to the polls. Moody’s also warned that, were Greece to exit the euro, further ratings actions on European banks could well be needed.

The long-expected news had little immediate impact on financial markets in Asia, with the euro holding firm around $1.2616.

“Today’s actions reflect Moody’s view that Dutch banks will face difficult operating conditions throughout 2012 and possibly beyond,” Moody’s said in a statement.

The agency said there were heightened risks for creditors amidst elevated uncertainty and downside risks to the economic outlook and fragile investor confidence in Europe.

Moody’s agency said it had cut the ratings by two notches to Aa2 for Rabobank Nederland RABOO.UL, to A2 for ING, to A2 for ABN AMRO Bank N.V. ABRGPG.UL, and to Baa2 for LeasePlan Corporation N.V. LEASP.UL.

The long-term debt and deposit ratings for SNS Bank N.V. SRSNS.UL were downgraded by one notch to Baa2. The short-term ratings for all the groups were unchanged.

Moody’s said it had factored into the ratings an increased risk of Greece leaving the euro area, but this was currently not the central scenario.

“If a Greek exit became Moody’s central scenario, further rating actions on European banks could well be needed,” it added.

Moody’s said the negative outlook for ING took into account the bank’s funding structure, which relies substantially on wholesale funds and a significant amount of non-domestic deposits.

Dutch bank and insurer ING received 10 billion euros in state aid during the 2008 financial crisis.

It was subsequently forced to separate its banking and insurance businesses and sell off various assets to meet European Commission requirements for state aid. The disposal could also help to raise money to repay state aid.

Stocks jumped on Thursday after news major central banks are preparing coordinated action if the results of Greek elections this weekend lead to turmoil in financial markets.

The central banks from major economies will take steps to stabilize markets and prevent a credit squeeze if necessary, Group of 20 officials told Reuters.

The news late in the trading day invigorated a market that has been highly volatile this week, whip-sawed by concerns the ballot in Greece on Sunday may set the stage for the country’s exit from the euro zone.

Energy was the top-gaining S&P sector .GSPE, rising 1.7 percent, helped by a 2 percent rise in U.S. crude oil prices. Chevron Corp was a top boost to the Dow, up 1.8 percent to $101.92.

Some of the initial pop in prices faded into the close, however, with Wall Street still seen subject to sharp swings. The Dow hit an intraday high up 1.6 percent but closed up 1.2 percent.

“I can’t imagine it as the start of the big move up because there are still many issues out there,” said John Manley, chief equity strategist at Wells Fargo Funds Management in New York.

The Dow Jones industrial average gained 155.38 points, or 1.24 percent, to 12,651.76. The Standard & Poor’s 500 Index rose 14.22 points, or 1.08 percent, to 1,329.10. The Nasdaq Composite Index added 17.72 points, or 0.63 percent, to 2,836.33.

Each trading day this week has been almost a reverse image of the previous one, with the market rising around 1 percent one day only to fall by about the same margin the next. That has left the S&P 500 flat on last Friday’s close.

“We have been in an extended period of not just volatility but dysfunction for quite some time, and it seems as though just recently that dysfunction has taken on a whole other dimension,” said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

“The volatility is in such short bands of time that even traders tend to get less enthusiastic about catching inefficiencies and trading trends because of the whipsaw; the risk reward is not attractive.”

Economic data on Thursday added to recent evidence of a slowing recovery, with an unexpected rise in the number of Americans filing new claims for unemployment benefits last week.

Some investors are hoping the Federal Reserve may signal more easy money to counter sluggish growth when it releases its policy statement next Wednesday at the close of a two-day meeting.

Trading came on low volume after the weak data in the U.S. labor market and rising bond yields in Italy and Spain weighed on investor sentiment. About 6.6 billion shares changed hands on the NYSE, the Nasdaq and the Amex, 7 percent below the 20-day moving average.

“This is a classic rumor-driven market where the nervous shorts cover their shorts and the under-invested longs go and buy, just by looking at the headlines. There is the fear of missing out,” said James Dailey, portfolio manager of TEAM Asset Strategy Fund.

That kind of sentiment was highlighted as Greek bank stocks surged more than 20 percent on Thursday, with speculators appearing to be betting on a favorable pro-bailout outcome after Sunday’s election. The action there drew the attention of traders on Wall Street.

In other U.S. data, consumer prices fell 0.3 percent in May, the biggest drop in more than three years, which could also give the Fed room to ease policy next week.

“What you are seeing today is investors really embracing two things: inflation expectations and the slowdown in the recovery and the jobs market and what that means for maybe future quantitative easing,” said Joshua Schachter, portfolio manager at Snow Capital Management in Sewickley, Pennsylvania.

Moody’s Investor Service cut its rating on Spanish government debt on Wednesday by three notches to Baa3, saying the euro zone plan to help Spain’s banks will add to the country’s debt burden.

On Thursday, Egan-Jones cut France’s sovereign credit rating to BBB-plus with a negative outlook, citing expectations that France’s funding costs will see more pressure as the euro zone sovereign debt crisis continues to roil markets.

In company news, Nokia Corp said it plans to cut another 10,000 jobs, a fifth of its work force, and said its phone unit would post a deeper-than-expected loss in the second quarter because of tough competition. It’s U.S.-listed shares of Nokia plunged 15.8 percent to $2.35.

Commodities

Oil rose for a second day in New York on speculation that the Federal Reserve may take more steps to stimulate the economy and on OPEC’s call on members to cut production in excess of quotas.

Oil for July delivery advanced as much as 58 cents to $84.49 a barrel in electronic trading on the New York Mercantile Exchange, and was at $84.25 at 11:19 a.m. Sydney time. The contract increased 1.6 percent yesterday to $83.91, the highest close since June 8. Prices are 0.1 percent higher this week and down 15 percent this year.

Brent oil for August settlement rose 57 cents, or 0.6 percent, to $97.74 a barrel on the London-based ICE Futures Europe exchange. The front-month price for the European benchmark contract was at a premium to West Texas Intermediate of $13.15, up from $13.12 yesterday.

Gold was flat on Friday after five straight days of gains, supported by hopes for monetary easing after sluggish U.S. data, while investors were looking to a key vote in Greece on the weekend that could unleash havoc in financial markets.

Spot gold traded nearly flat at $1,621.79 an ounce by 0052 GMT, on course for a 1.8-percent gain from a week earlier.

The U.S. gold futures contract for August delivery edged up 0.2 percent to $1,623.30.

Currencies

The dollar fell for a second day against the yen after reports signaled a slowing U.S. economy, boosting the case for the Federal Reserve to take more steps to bolster growth.

The dollar depreciated 0.2 percent to 79.35 yen at 5 p.m. in New York after falling 0.1 percent yesterday. The U.S. currency dropped 0.6 percent to $1.2633 versus the euro. The 17- nation currency added 0.4 percent to 100.24 yen.

The pound rose 0.4 percent to $1.5563 and pared its loss against the euro to 81.18 pence from as weak as 81.21 pence earlier.

The Aussie strengthened 0.9 percent to $1.0024 and the Canadian dollar rose 0.8 percent to C$1.0226 against the greenback.

The kiwi rose 1.2 percent to 78.25 U.S. cents, touching the strongest since May 14th.

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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