Stocks rally as Spain avoids downgrade

Today’s US Opening Call provides an update on:

• Spain avoid downgrade sending stocks higher;
• Germany will insist on currency commissioner which is likely to be rejected;
• UK jobs figures easily beat expectations;
• Earnings season continues with more major banks reporting this morning;
• Dollar continues to drop as risk appetite increases.

Stocks are trading higher this morning in Europe after Moody’s decided against downgrading Spain to junk status.

This came as a surprise in the markets with many assuming a downgrade was inevitable. The other surprise was how well it was received in the markets. It was only last week that an S&P two notch downgrade was seen as a positive move for the eurozone despite being met with disapproval in Spain.

I think the key point to take from Moody’s decision was not necessarily to the decision to leave Spain’s credit rating at Baa3 but the reason behind it. They claimed that the ECB’s support along with Spain’s own efforts should allow them to continue to access the capital markets.

The key point here is that they agree that the OMT’s are an effective backstop that should avoid the need for Spain, as well as other countries, to request a full bailout. As long as they are technically able to fund themselves, they will remain investment grade.

German Finance Minister Wolfgang Schaeuble risked causing further controversy yesterday when he claimed the country would demand the appointment of a currency commissioner. Giving a commissioner the power to intervene with national budgets is unlikely to be agreed by the other member states who believe the fiscal compact is sufficient enough to ensure countries remain disciplined.

Jobs figures out of the UK this morning exceeded expectations, with jobless claims falling by 4,000 and unemployment dropping to 7.9%. Employment is at a record high in the UK according to the ONS, however it is worth noting that part-time employment is also going to make up a larger portion of this than normal.

The earnings season continues today with a long list of companies reporting before and after the US session. We have some more major banks reporting before the opening bell, including Bank of America, Bank of New York, Blackrock and Northern Trust. Banks have so far performed relatively well in the third quarter with JP Morgan, Citigroup and Goldman Sachs all beating earnings expectations.

The euro is trading higher against the dollar this morning. The pair has formed a double bottom on the charts over the last month since finding strong support from the 200 day simple moving average. The euro broke above the neckline yesterday suggesting we’re going to see a significant move higher. However it is likely to find strong resistance around 1.316 from the descending trend line dating back to May last year.

Sterling is trading higher in the cable charts this morning. The pair has found resistance this morning around 1.6125, however it has since moved above here before finding further resistance around 1.6150. If the pound can continue to rally higher we could see it target 1.627, where the pair has failed to close above this year.

Ahead of the open we expect to see the S& P flat, the NASDAQ down 8 points and the Dow down 25 points.

Author: Craig Erlam

Tagged Corporate Earnings, EUR/USD, GBP/USD, Germany, Moody's, S&P, Spain, UK