- S&P downgrades Portugal 2 notches to A- from A+; downgrades Greece 3 notches to BB+
- Case Shiller home price index rises 0.6% in April from year earlier
- US consumer confidence rises to 57.9 in April from 52.3 in March
- German finance minister: Germany will not let Greece down; German government not asking for restructuring, pushing for quick action
- Greece guarantees bank deposits as Greek banks downgraded along with sovereign rating; bank index falls sharply
- Fed’s Bernanke repeats US deficit on unsustainable path
- Europe shares fall 3.1%; S&P 500 falls 2.3%; oil falls 2.9%, LatAm index falls 4.6%
- US yields tumble on flight-to-quality; 2 year note falls 9 bp to 0.96% 10-year notes fall 12 bp in yield
Flight to quality was trade of the day after S&P downgraded Portugal and, a short time later, Greece.
The market tried to take the news in stride at first, slipping to 1.3210 but holding above barriers at the 1.3200 level. We squeezed up to 1.3265 on upbeat comments toward Greek aid from the German FinMin but then came lower around midday in New York as equity markets sold off heavily in Europe and North America. European bank shares were hit hard, with Greek banks hit the hardest.
1.3200 barriers yielded late in the US session and prices slipped as low as 1.3166 before stabilizing. The sub-1.3200 close keeps the pressure on EUR/USD with 1.3265/70 now seen as important resistance on rallies. Trailing stops will cluster just above.
Central banks were massive buyers of EUR/USD between 1.3300 and 1.3350 today, so one has to presume they will be happy to offload some of those stale longs if they get the chance in the next few days, which should limit rallies.
AUD and CAD were sold off, as were the JPY crosses today, with traders reducing risk wherever possible. Gold broke to a new 2010 high at $1172 this afternoon as the yellow metal benefit from its traditional role as a store of value.
Today’s Portugal downgrade has traders looking beyond the Greek bailout and pricing in the risk that Greece is the tip of the proverbial iceberg. As we learned in the fall of 2008, once confidence in institutions is lost, the unthinkable can happen. While odds are that Portugal, Spain, etc are just fine, investors are beginning to hedge, just in case they are not. If that intensifies, the dollar will only game in town, once again.
