The FTSE sank on the open after S&P downgraded Japan’s sovereign credit rating, but after the initial shock faded, a rally in the mining sector pulled the blue-chip index back in the black.
Japan downgraded
Credit rating agency S&P surprised financial markets this morning after downgrading Japan’s sovereign credit rating from AA to AA-. The country’s high debt burden and lack of a credible plan from the government to manage the issue were the primary reasons for the downgrade.
The report from S&P said ‘The downgrade reflects our appraisal that Japan's government debt ratios - already among the highest for rated sovereigns - will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s... In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics.’
Japan faces a difficult task in restoring growth in the economy due to persistent deflation pressures, which have suppressed asset prices. While the aging population and ensuing social security obligations, coupled with a shrinking labour force, will result in further imbalances in the fiscal position.
The downgrade sent the Japanese yen sharply lower against the US dollar, while the euro and Aussie dollar also declined. However, currencies rebounded from the initial shock and were paring earlier losses by mid-morning.
FOMC statement
Prior to the S&P downgrade, equity futures were trending higher after fairly upbeat comments from the FOMC last night. The accompanying statement following the FOMC interest rate decision said that the economic recovery is continuing, with household spending picking up and business spending on equipment and software increasing. However, the pace of the growth is still not satisfactory and employers still remain reluctant to hire. The FOMC also said that ‘Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.’
This means that the Fed will continue with its quantitative easing programmes and interest rates are likely to remain low for some time further. Investors have been concerned that the US is not immune to inflation, particularly with prices rising in China, Europe and the UK.
In a separate press release this morning, the FOMC has decided to close certain liquidity facility arrangements that were put in place during the financial crisis. These include the Commercial Paper Funding Facility and the temporary liquidity swap arrangements between the Fed and other central banks. The move suggests that the Fed is growing more confident that the economic recovery is becoming self-sustaining and that the quantitative easing programme will provide enough liquidity to support the market.
UK equities
By 10.15am (London time) the FTSE 100 rose 16.15 points (+0.27%) to 5985.36, while the FTSE 250 added 29.86 points (+0.26%) to 11642.13.
Miners were the best-performing sector this morning with Randgold Resources, Fresnillo and Kazakhmys gaining 5.72%, 5.04% and 2.41% respectively. Shares in Randgold jumped after HSBC upgraded the stock from ‘neutral’ to ‘overweight’. The analysts said ‘Recent disappointments have resulted in the stock price falling circa 17 percent versus peers, but we believe the shares are oversold, opening a buying opportunity.
Meanwhile, Kazakymys rose after the miner said copper production would be in line with forecasts in 2010 at 303,300 tonnes, while silver production of 14.1 million ounces was ahead of previous guidance.
Pharmaceutical giant AstraZeneca rose 1.97% to 3134p this morning after fourth-quarter results topped estimates. Profit excluding certain items was $1.39 a share, beating the $1.33 a share median forecast from analysts surveyed by Bloomberg. Revenue fell from $8.9 billion to $8.62 billion, but this was still more than the $8.35 billion forecasted by analysts. The company said that it would be buying back $4 billion in stock this year, up from $2.1 billion in 2010.
The banking sector opened lower this morning, following Japan’s sovereign debt downgrade. RBS led the decline, falling 1.23% to 42.5p, Standard Chartered lost 0.51% to 1652.5p and Lloyds was down 0.38% to 62.77p.
US pre-market
At 1.30pm (London time), US initial jobless claims and durable goods orders will be announced, followed by pending home sales at 3pm.
Reporting before the opening bell are bellwethers Caterpillar and Proctor and Gamble. Microsoft and Amazon report after today’s close.
March Dow and S&P futures recovered from an initial shock from Japan’s downgrade to trade basically unchanged at 10.15am (London time). However, the momentum suggests that futures may rise further, which could see Wall Street open higher. Results from Caterpillar are likely to dictate sentiment this afternoon.
