Moody's Downgrades Portugal

Moody’s announced overnight that they were downgrading Portugal’s debt rating by two levels to A1… I don’t want to get started on these ratings agencies again; they have become as useless as a pay toilet in a diarrhea ward! OK… That probably wasn’t too good, to start off today’s letter with a saying like that, but… It’s what my fat fingers typed, so it stays!

The currencies are a bit softer this morning overall, but the euro (EUR) seems to have slept in yesterday’s clothes. The single unit starts off the day (for me at least) at 1.2585, which is darn near where we were yesterday morning! This is good… You see, the single unit has remained unfazed by a report this morning, that German Investor Confidence, as measured by the think tank ZEW, dropped for a third consecutive month in July. Those that were surveyed pointed to the Bank Stress Tests as their reasons for a lack of confidence this month.

Last Friday, Chris wrote about the stress tests, and said that the markets were waiting for confirmation that they were OK, before moving the euro any higher. A reader wanted to know why these stress tests would be market moving, when the stress tests here in the US were not… Ahhh grasshopper… That’s the beauty of being the BMOC (Big Man On Campus)… What’s good for the goose is NOT good for the gander…

Hey! Remember yesterday, when I told you that the Bank of Canada would get two pieces of data to look at before their rate announcement next week? Well, the Bank of Canada’s second quarter Business Outlook Survey, and Senior Loan Officer Survey printed yesterday… And both indicated that credit conditions are easing. Both reports also suggested that there is strengthening in economic conditions, and that the availability of credit improved in the second quarter.

OK… So here’s the skinny, folks… The two Bank of Canada surveys released this morning indicate an improvement in lending conditions from both a borrower’s and a lender’s perspective… And having this kind of feeling about the domestic economy and the ability to lend and receive loans, is the final nail in the rate hike coffin for the Bank of Canada (BOC) next week… I fully expect them to raise rates 25 BPS (1/4%) to 0.75%, at their July 20 meeting.

The Canadian dollar/loonie (CAD) isn’t reacting positively to this news, though, as the currency has backed off their three-day rally. That’s OK… It just means that buyers get a chance to buy at a cheaper level than yesterday!

Aussie (AUD) & kiwi (NZD) have backed off their three-day rallies too, this morning… Here it’s yet another case of… An overreaction! Get this… China is going to print their second quarter GDP report this week (the 15th), and the latest forecasts have second quarter Chinese GDP at 10.5%!! Now… Doesn’t that look great? Unfortunately, for the naysayers, they will point their fingers at the fact that Chinese GDP fell from 11.9% in the first quarter to 10.5% in the second quarter, and claim they were correct that they Chinese economy was collapsing.

Did you see what I just wrote? Collapsing? HARDLY! Moderating? Yes! But still, 10.5% GDP is nothing to get all in a huff about, and cause you to take your bat and ball and go home! Here at home, US officials get all excited and pound their chests when we print 3% growth!

So… Any old way… The naysayers are winning the battle today, and that hurts the higher yielding currencies like Aussie and kiwi, who have such close ties to China… And depend on Chinese economic growth. Don’t worry boys and girls, the Chinese economic ship is still out to sea, and it’s not even close to coming in to dock!

In a country that I just plain forget to talk about all the time (India), we have some quotes by the Finance Minister, Mukherjee, this morning that I think are good things to talk about…

Mukherjee was speaking in Mumbai this morning and had these little jewels to say…

“First, our immediate task is to restore 9% growth in the country’s economy.”

“India will bring fiscal debt to 5.5% in 2011, and 4.5% in 2012.”

Those are two things that warm my heart, folks… Promoting growth, but bringing in the debt to more manageable levels… Now… If they can continue to work and bring their debt levels to below 4.5% in a couple of years, that would be fantastic!

I have to say that this long-term view on India is one of the reasons I liked the BRIC MarketSafe CD that we did last summer. All of the countries (Brazil, Russia, India, and China) had long-term forecasts for appreciation…

Well… I read something this morning that made my stomach turn… The headline was: “PIMCO shifting to Treasuries, from European Debt”… Geez… I thought these guys were saying just a few months ago that they were selling their Treasuries! Yes, Chuck, times change, and therefore we must change… But… Buying Treasuries now? UGH!

There was a report from Japan overnight, that Japan’s Public pension fund had turned to a net seller of Japanese Government Bonds (JGB’s) for the first time in nine years, in 2009…

1. Did it really take a year and a half to get this data?
2. Why did they tell us now?

It does explain though (a year-and-a-half later) yen weakness at that time… Too bad they couldn’t do us a big favor and tell us when it was going on!

Well… The Portugal debt rating cut by Moody’s did one thing other than apply pressure to the euro, this morning… It lit a fire under gold, and got it back above $1,200 after the shiny metal had slipped below the $1,200 figure for most of yesterday.

Then there was this… Want a good indicator as to why banks aren’t lending money these days? I saw this on YAHOO Finance… “Figures provided by FICO Inc. show that 25.5% of consumers – nearly 43.4 million people – now have a credit score of 599 or below, marking them as poor risks for lenders.”

You know, all these problems with lost jobs and people living beyond their means is finally catching up… From here on out it’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use, when they have credit scores below the “Mendoza Line” for lending…

To recap… Currencies are softer overall this morning, although the euro is trading bang on yesterday morning’s level, even in the face of a bad print on Business Confidence from ZEW. Aussie and kiwi are softer, as people continue to get the terms “collapsed” and “moderated” confused for China’s economy. And the loonie breaks its 3-day rally giving investors a cheaper level to buy, today.

Chuck Butler
for The Daily Reckoning