EU in the Spotlight

Late yesterday as you may know, Moody's hit the markets with what is being called a surprise downgrade of Portuguese sovereign debt, cutting their credit rating by 4 notches to Junk status, citing Portugal may, much like Greece, need a second round of bailouts before it can return to the debt markets in 2013. Of particular irritation to the rating's agencies is what they consider to be the Troika's mishandling of the crisis with an emphasis on making private bond holders share the burden of future bail outs; something the rating's agencies say will trigger a credit event making collateral questionable if not useless.

There's also growing concern that Ireland may need a second round of bailouts as well. This is not good news for Italy and Spain.

As for this being a surprise, I'm not so sure. Yesterday in this post, I highlighted recent weakness in the Euro, I think smart money had a clue as to what was coming as the Euro de-coupled with the equities market and the Australian dollar as I also showed you, which is a canary in the coal mine for Chinese problems.


Also weighing on the markets and in particular EU markets is the Chinese rate hike of 25 basis points, pointing to a perhaps, "Not so soft landing for China". Since Europe is China's biggest trading partner they've shown a vested interest in buying up EU debt from Greece to Hungary. The fact that China is now showing signs of trouble, which include up to 1/2 a trillion dollars in bad debt that has been hidden, may stem the tide of Chinese funds to help out the EU zone.

It seems the path the Troika has decided on WILL NOT sit well with the rating's agencies and make bailouts all the more difficult. Already the cost to insure sovereign default in the PIIGS has jumped after the Moody's action.

Another ominous sign for Europe includes the Icelandic volcano, Hekla, the most feared of all of Iceland's volcanoes. It appears Hekla is about to erupt, but this would be much worse then the two previous Icelandic volcano eruptions that shut down flights over Europe, at a time when the EU can least afford a drop in commerce.

In the US, the Challenger jobs report for June showed a 12% increase in layoffs, the second month in a row and this news won't bode well for the ADP/NFP reports coming out later this week.

Remember, what we see, as we saw many changes in character yesterday, is movement discounting news we are not yet privy to at the time, but these changes need to be taken seriously, even if we don't understand them at the moment.