Member Article

FTSE higher despite Greek downgrade and weak US

S&P late yesterday cut Greece’s long term credit rating to ‘selective default’, following a similar move by Fitch last week. The agency cited the retroactive insertion of collective action clauses in Greek bonds, a move that forces minority holders into a restructuring if it is agreed by the majority. S&P stated that the insertion changed the original terms of the debt, although the rating would be upgraded to CCC once the debt restructuring has occurred (which will see bonds lose around 74% of their full redemption value).

The Italian treasury sold €3.75 billion of new 10 year debt at auction today at a yield of 5.5%, much improved from the 6.08% at an equivalent issue in January. The 10 year benchmark yield for Italy subsequently traded under 5.4%, with investors taking confidence that the country is increasingly able to finance itself at less punitive rates.

It comes ahead of the ECB’s second 3 year long term refinancing operation (LTRO), with bids being made today and results out tomorrow. It follows what was widely regarded as a successful first round back in December which saw banks tap €489 billion of funding. There has been much debate as to how much of this cheap funding will be taken in the second uptake, with estimates being reduced from as much as double the first round (suggested by Goldman Sachs in January) to something more in line with the previous quantity. The ECB today also stated that it was temporarily suspending the eligibility of Greek bonds for use as collateral in the operation, following S&P’s downgrade.

Markets were surprisingly buoyant throughout the morning although US data around midday was sufficient to change the mood. Firstly there was a 4% fall in durable goods, and a 3.8% fall in core durable goods in January, which were both well below expectations. This was quickly followed by a disappointing S&P/Case-Shiller house price index measuring the change in the selling price of family homes in 20 areas in the US. The index fell by 4% in the fourth quarter of 2011 from a year earlier, with homes in America now priced at levels not seen since 2001/2002. Although there have been signs recently that the housing market and broader economy were improving, today’s data suggests a much more mixed picture.

The FTSE100 dipped into negative territory following the US numbers, although recovered somewhat towards the close to finish up 0.2% (a 10 point gain) at 5926.

This was posted in Bdaily's Members' News section by James .