Standard & Poor's (S&P) today shook up global markets by cutting the credit rating of Spain. This came within the same 24 hour span of its downgrading of Greece and Portugal's sovereign credit ratings. This subject and more are the topic of Today's Coffee.
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Wednesday was supposed to be "Fed Day", but Standard & Poor's had to go and downgrade Greece, Portugal and Spain and ruin everything for Bernanke and crew. The rating cuts started a downward spiral for the euro and euro area stock markets. It did not help things in the US either, sending the Dow down 1.9% on Tuesday. However, by Wednesday afternoon Europe was scrambling to restore the situation and get a ton of money to Greece in a hurry. Also, US investors realized that the troubles overseas would help US assets draw capital, and the Dow recovered a half a point by the close. It didn't hurt things that American companies are reporting decent EPS results, and forecasting an okay outlook as well.
S&P Declares War on Europe
Gee whiz, do you think I had anything to do with this? See "Standard & Poor's and the Financial Crisis." I fantasized about receiving a telephone call from Greek Prime Minister Papandreou or German Chancellor Angela Merkel this morning telling me to cool it on S&P. I'll have more to say on this subject in the days ahead, and so I want to briefly cover what happened and its impact in this report.
Despite EU and IMF assurances of support for Greece, and the fact that the parties were actively preparing the distribution of aid, Standard & Poor's (NYSE: MHP) went ahead and downgraded the nation state to junk status, and a level that put it on par with Azerbaijan in terms of its credit worthiness. Anyone who has been to both states would agree that they are worlds apart, though geographically speaking, not so far distanced. So what gives over on Water Street then? That's what EU representatives wanted to know today, as they were reportedly "irked" by the action.
Certainly Germany's dilly dallying and Europe's mostly talk and little action played a role. As a result, the EU is scrambling now to put up three times as much capital as was initially determined would be needed to hold off S&P and crew. The bleeding euro stabilized on that news. In Athens, stocks actually rose today (Athens Composite Share Index +0.63%), as it looks like Europe has the catalyst it needs to finally act. The story was different throughout the rest of the continent though, as fear spread across Italy and the U.K. that perhaps they would be targeted next. This is how it played out across European markets.
Spain's IBEX 35 Index down 2.99%
Portugal's PSI General Index down 2.03%
Greece's Athens Composite Share Index up 0.63%
Italy's FTSE MIB Index down 2.43%
Germany's DAX down 1.22%
France's CAC 40 down 1.5%
U.K. FTSE 100 down 0.30%
Swiss Market Index down 1.37%
Irish Overall Index down 2.5%
Netherlands AEX down 1.31%
Belgium's BEL 20 down 2.39%
Denmark's OMX Copenhagen 20 down 1.75%
In fact, stocks were down across Asia and the rest of Europe, Russia and ex-Soviet states as well. Only American markets rose, including South and Central American shares. However, this has more to do with the EU and IMF's rush to get sufficient aid to Greece as quickly as possible than it does some masterful American plan.
FOMC Policy Statement
Despite having its thunder taken away by S&P, the Federal Open Market Committee (FOMC) produced a policy statement at 2:15 PM as expected. We reproduced the statement at Wall Street Greek, and you can find it here: Fed FOMC Policy Statement April 2010. If you just want the skinny of the report, well this should do you just fine.
The Fed kept rates at their historically low range of 0 to 0.25%. The Federal Open Market Committee also kept the phrase "extended period" within its wording regarding inflation expectations and how long it might keep rates so low. Thomas Hoenig has been a leading indicator for the FOMC, as his dissenting vote with regard to the language of the statement tells us the Fed is thinking about altering its "extended period" phrase. Hoenig dissented again, as expected.
The whole of the market is waiting for the Fed to begin speaking in nearer terms as far as future rate hikes are concerned. Ongoing housing doldrums, the latest upheaval in Europe and little sign of inflation allowed the Fed to stay put regarding the language and its thinking. Basically, the statement was a none factor today due to the little variation in it from prior statements. An eventual change in inflation targeting and even the language around the "extended period" phrase should act against stocks when it occurs.
Weekly Mortgage Activity
Just as we predicted in our weekly stock market schedule, "more gains" were evident in the MBA's Weekly Mortgage Activity data. For the week ended April 23, the Purchase Index improved for the third consecutive week, this time by 7.4%. By now readers should be well aware of the end of the month deadline to enter into contract for the First-Time Homebuyer Tax Credit, and its resulting impact on this measure.
The Market Composite Index of mortgage volume activity still lost ground in the reported period, falling 2.9%, as the Refinance Index declined by 8.8%. Rates rose modestly in the period, with 30-year mortgages contracted at an average fixed rate of 5.08%, up from 5.04 the week before. That said, troubles overseas have capital flowing swiftly into US assets, and so yields should drop on increased demand. That means long rates are dropping, which should help drive refinancing activity in the current week.
The EIA reports on Petroleum Status each Wednesday at 10:30 AM. This week's report covered the period ended April 23. Crude oil inventory has been on a trend of steady rise and kept consistent again last week, as stocks increased by 1.9 million barrels (same as April 16 period). Gasoline stores, however, changed direction, with inventory dropping by 1.2 million barrels last week (after increasing by 3.6 million the week before).
Given that the prior week figure was a bit heavy, it seems possible that refinery maintenance was behind the variation. Refiners are likely gearing toward gasoline production ahead of the summer driving season, and moving away from other distillate production (products used mainly in winter). It seems to me refiners worked a bit of overtime in the April 16 period to produce more gasoline ahead of forecastable downtime for maintenance. Still, distillate fuel production actually increased last week on the whole. Therefore, maybe a major producer had an impact on gasoline. I know a bit about the industry, having covered several companies within it (including some big winners like the acquired Evergreen Resources - by Pioneer). Still, I would (and maybe I will) consult with an industry analyst or insiders to verify what is occurring in industry with regard to gasoline.
Inventory of both commodities remained above the upper limit of the average range for this time of year.
At the hour of publishing, we were still waiting on Brazil's central bank to raise its key rate by as much as 0.75%. Brazil's economy is blazing, according to last week's economic forecast published by the IMF. The forecast predicts 5.5% growth for Brazil in 2010.
Corporate News Drivers
Barclay's (NYSE: BCS) Retail & Restaurant Conference kicked off in New York City. Bank of America (NYSE: BAC) held its annual stockholders meeting scheduled.
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