The US debt conflict continues

illustration: statue of liberty in new york

(28.07.2011) The debt crisis is still an issue in the euro-zone, while markets have started to show signs of nervousness to the ongoing conflict about the debt ceiling in the US. In the currency markets USD has regained some of its strength after Tuesday's depreciation.

By Ole Kjennerud, Analyst at DNB Markets

While the debt ceiling in the US has been frequently discussed in this report the last weeks, there have been relatively few reactions in the markets from the lack of a solution. However, yesterday we did see signs of nervousness. E.g. the price of insuring against US default has increased to record high levels. Premiums on one-year and five-year sovereign CDS increased to about 90 and 65 basis points, respectively. The former is higher than the level from March 2009, while the latter is at an all time high level.

The breeze from rising insecurity also gave goose bumps to the equity markets across the world. Despite good results from Boeing, ConocoPhillips and Amazon, among others, the insecurity emerging from the political dispute seems to be dominating the effect from the rather good results we have seen from the corporate sector the last weeks.
 
There are, however, few signs of nervousness in the market for interest rates, and Treasuries has not seen a significant increase. The dollar strengthened throughout the day after being depreciated on Tuesday against most of the major currencies. This is also the case against the yen, but USDJPY is still at a very low level, which gives rise to speculations of whether Bank of Japan again will intervene in the currency market. As of this moment, USDJPY is traded at 77.88.

Concerning American debt, it is now speculated that a down grade of sovereign debt may be evident, even if the debt ceiling is raised, if this is not undertaken along with a plan that covers how the debt burden will be handled in the long run.
 
The Euro has come under new pressure, and depreciated against USD and most other major currencies. A contributing factor to the fall may be a statement by the German Finance Minister, Wolfgang Schäubl, who said that the current Greek crisis package will be insufficient in terms of a final solution to the euro-zone debt crisis. Interest on Italian treasuries has again increased, and is almost at the same level as last week.
 
In the UK industrial orders for July fell, which strengthens the picture of an economy with low growth and few roads leading to an escape. CBI trends suggested that the order balance fell to -10 in July, against +1 in June, which is below consensus' expectations at -2 (Reuters).Underlying causes may be lagging effects from the Japanese earthquake and the extra holiday from the Royal wedding. The survey results are an indication of a stalled British industry. As with most other major currencies the pound depreciated against the dollar, but these movements can hardly be attributed to the CBI-results. As of now, GBPUSD is traded at about 1.63, against 1.64 from yesterday at the same time.
 
Orders for durable good in the US were not positive, as they decreased with 2.1 percent from May to June. This was well below consensus who expected an increase of 0.3 percent (Reuters). By excluding the numbers from the transport sector, we get a better picture of the actual situation. With a growth rate of 0.1 percent, orders excluding transport show that industrial growth is almost non-existing. 
 
A degrade of Cypriot sovereign debt became a reality on Wednesday, as Moody's downgraded their rating by two notches, to just above junk-level. Moody's argues that the down grade is a result of a "sensitive political climate" and great exposure to Greek debt among Cypriot banks.