Italy Gets Cut

A new day is upon us but the same stories reverberate through the markets. The eurozone has taken another hit with Italy having its debt rating cut by Standard & Poor’s. This is the latest move in a series of events that will worry investors. Italy had its rating cut one level from A+ to A adding to the ‘negative’ outlook for the country. S&P believes, similar to Greece, that Italy will struggle to cut state spending and bring its finances back under control, especially with such poor growth prospects. We as brokers feel that this is yet another step towards a fragmented euro.

Pound Sterling – UK Markets

The UK will look to benefit from the recent downgrade of Italy as investors seek safer assets. UK government bonds have risen for the third consecutive on the back of the news. However, despite all of this sterling remains little changed against the euro and it is also expected that our nation’s currency could fall to an eight-month low versus the US Dollar. Whilst there is little data due out today, tomorrow will see the release of Bank of England Minutes which will outline the discussions that took place at the last rate-setting meeting. The minutes are expected to show a 9-0 vote for making no changes to the UK’s 0.5 percent interest rate level or the £200 billion asset purchase scheme.

US Dollar – US Markets

Whilst the Bank of England debates whether or not another round of quantitative easing will be initiated, the Federal Reserve has a much more creative option up their sleeves. The Fed is discussing the possibility of implementing “Operation Twist” this week, a method first used in 1961. The aim will be to boost private sector investment through a number of mechanisms with the idea that certain moves will keep long term yield costs down. Furthermore, as we expected, Republicans have rejected President Barack Obama’s plans to raise $1.5 trillion in new revenues by taxing higher earners. This echoes what occurred during the debt ceiling debacle. Despite all of this the dollar remains in a strong position and continues to strengthen against sterling.

Euro – European Markets

Greek ministers have stated that it has held productive talks with its debt inspectors. The aim of the meeting is to decide whether Athens should get more bailout money. Talks will continue well into Tuesday and are likely to continue for some time. In the intervening period markets tumbled amid fears Greece will default and a call from the International Monetary Fund requested deeper spending cuts. The loan itself will only be granted if Greece dramatically reduces its deficit, which it plans to do by cutting the size of the state sector through redundancies, pay cuts and privatisations – something I’m sure every Greek citizen will be thrilled to hear.

Other Currencies – Highlights

On the back of its recent currency swerve the Swiss government has also lowered its growth forecasts for this year and next, calling the franc still highly overvalued. Despite a near 10 percent fall in value in a matter of minutes which will have benefited most (unless you were a rogue trader…apparently) the government is still calling for further weakening to help boost its crippled export market. In June, it had forecast the economy to expand 2.1 and 1.5 percent this year and next. However, the most recent forecast has seen these figures fall to 1.9 and 0.9 percent respectively.