08 Aug.
Absa: SA Morning Sheet.
This is a daily economic comment …
The sheets can be downloaded daily from Absa Economic Research
An extract fro today’s sheet is provided as an example:
This morning will be a great test of people who say they do not look at their work email over the weekend. Friday’s US downgrade hit the screens only after 8pm NY time, so while these people may look more rested than the rest of us this morning, they are about to receive one almighty shock. Our global colleagues put out several relevant pieces over the weekend, including “S&P downgrade the US long-term rating: First impressions” and “US downgrade: Implications for FX”. A playback is also available for Sunday’s conference call hosted by our Barcap Research’s Heads of US Fixed Income, Asset Allocation, and FX Strategy. Below is a brief summary of that work and some thoughts on SA.
The what? S&P cut the US long-term sovereign rating to AA+ from AAA, affirmed the short-term rating at A-1+, removed both ratings from CreditWatch but left a negative outlook on the long-term rating. (Interestingly, S&P now rates four US corporates as being more credit worth than the sovereign).The why? On 14 July S&P warned that $4trn in deficit savings would be needed over a 10-year horizon for debt dynamics to stabilise and a downgrade to be avoided (the US had been on negative CreditWatch since April). Last week’s deficit deal cut by just over half that amount, with further savings to follow, hopefully, the November 2012 election. S&P also highlighted a lower comfort level with the political process around deficit reduction.
The implications? The primary fear will be around forced selling of US Treasuries, but we think this is unlikely to happen. As the largest, most liquid bond market, Treasuries will remain a key reserve asset for central banks. Mutual fund investment guidelines look sufficiently flexible to avoid forced selling, and a recent Fed note on risk weightings made it clear that banks will not have to sell. The major banks are also unlikely to be downgraded themselves as they are already several notches below AA+. Longer term the downgrade should see borrowing costs rise in the US (our research suggests by 25bp) and for a gradual further diversification of investors out of USD, but that’s the long-term. We will be watching for any signs of sovereign contagion outside of the US as other AAA sovereigns (the Eurozone has 6) may be put under the spotlight. Efforts to keep Italy and Spain out of the firing line have also already intensified, with the ECB signalling late Sunday night a willingness to purchase their bonds and the G7 offering verbal support. …
The sheets can be downloaded daily from Absa Economic Research
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