More Rain in Spain

Good Evening, Friends. Lest the market get happy and complacent in the wake of what appear to be excellent earnings from AMZN, S&P has cut Spain’s sovereign rating to BBB+ from A, with a negative outlook, indicating that additional cuts could be in the offing. This almost certainly means that Spain will have to pay higher rates on the additional notes and bills it needs to sell this year – fortunately, it has already completed more than half of the year’s requirement – and adds to the uncertainty over the outcome of Europe’s fiscal problems.

As seen on the chart above, the Euro immediately sank (and the Dollar, therefore, came higher) as a number of firms and traders went long in the past couple of days, given a somewhat “risk on” tone in the FX market. They are likely to be regretting it now. Other things being equal, this is probably not great news for U.S. equities. Although Spain isn’t a huge export destination, it is one of Europe’s larger economies, and there will be renewed concerns about the exposure of banks. I would look for the more internationally focused banks, like C, to be under scrutiny tomorrow.

I’ll be interested to see how futures trade this evening; given the great results from AAPL and,  from what I’ve seen thus far, AMZN, it could be that concern over Spain will prove to be a blip. That isn’t the way I’d bet at the moment, however. A friend who’s a trader for a large hedge fund observes that Ford and Spain now have the same credit rating. Best of luck.

About the Author Brian Keith

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