European stocks are expected to follow Asian markets and US futures lower at the open following Friday’s downgrade of US government debt by S&P but losses are likely limited by hopes the ECB will this morning move to buy Italian and Spanish debt.
Following a meeting of the ECB governing council on Sunday evening the central bank said “that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.”
Investors have taken that to mean the ECB will this morning begin buying Italian and Spanish government debt in the secondary market, a move some believe will immediately lower the cost of borrowing for the euro zone’s third and fourth largest economies.
“The ECB intervention will in our view bring an immediate tightening in Spanish and Italian bond spreads of the order of 100 to 150 basis points. In the absence of liquidity, investors will sell Germany and German bond futures initially, although recession risks should cap the sell off in the region of 2.75 percent in 10 year” said Jacques Cailloux, an economist at RBS in a research note following the ECB announcement.
The FTSE 100 is expected to lose 115 points by spread better Cantor whilst the DAX and CAC 40 are seen falling by just 55 and 28 points respectively.
Following the news from the ECB the G7 said it was ready to take “action to ensure stability and liquidity in financial markets following S&P’s decision to downgrade America’s AAA credit rating.
On Sunday night US Treasury Secretary Tim Geithner hit out at S&P’s decision.
“S&P has shown really terrible judgment and they've handled themselves very poorly," he said in an exclusive interview with CNBC.
"And they've shown a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement."
Speaking on CNBC on Sunday night S&P’s global head of sovereign ratings told CNBC his decision was valid and dismissed criticism from Tim Geithner, the US Treasury Secretary.
"It is a complete mis-characterization on the Treasury's part about what happened in that highly technical discussion," Beers said.
"These are large numbers...(but) even with these adjustments, the debt burden is rising so the substance of what we're saying has not changed." In overnight trade the dollar was lower but did not see major selling.
Oil prices fell but gold and silver gained around 3 percent.