The UK’s prized triple A credit rating has once again been put under the spotlight following a move by Moody’s to put their rating on negative watch and this time it was the turn of the agency Fitch to do the same. 

They have simply given the Chancellor a warning shot across the bows as it’s unlikely that any downgrade is imminent but they have reminded George Osborne to be vigilant in keeping on track with his budget deficit reduction plans.  So the chance of a downgrade from Fitch over the next two years has risen and the move acts as a reminder of the precarious state of affairs that the UK is in.  Whilst the likes of other major G7 economies like France and even the US have lost their triple A ratings, the UK remains one of the few countries holding onto it.  It is crucial to keep it in order to keep our borrowing costs on the international markets down and assist in reducing our debt which still remains one of the biggest debt to GDP ratios out of all the Western economies.

What Fitch has done is highlight the tightrope that the UK is walking and shows that whilst neither they nor the UK’s creditors want to see the country change course from their current budget deficit plans, they are also warning that growth is a vital ingredient in the next couple of years in order to achieve the targets.  This could be derailed by a number of factors such as a hard landing in China, a reigniting of the European sovereign debt crisis and another deep recession on the continent.

So next week’s budget is now even more important and needs to be seen as a growth enhancing budget.  Unfortunately, the headlines indicate otherwise and the Chancellor will be looking to grab the vote winning headlines such as keeping the 50p tax rate and announcing further taxes for the rich.  Such moves do not encourage business leaders and entrepreneurs to flood into the UK or start up businesses.  What needs to be done is new incentives for businesses to start using the vast sums of cash that they are currently sitting on, currently in the region of £700 billion, to invest in new staff and products.  As we saw in yesterday’s unemployment figures the labour market in the UK looks to be stabilising but is still a long way off from what’s happening in the US where unemployment has fallen sharply.

The FTSE is trading flat on the open this morning at around 5945.  Once again the London market has failed to push on through to new highs for the year which the German and French markets did yesterday.  The 6000 hurdle remains a tough one for UK investors to push the market over and the FTSE is lagging behind its European counterparts.  Yesterday the drag for the FTSE was the mining sector that is still suffering from an overhang from Chinese data that continues to soften.

Economic data is US heavy today with the weekly jobless numbers and at the same time producer prices, followed by the Phili Fed manufacturing survey which is expected to rise slightly.

On the currency front sterling has suffered in the face of Fitch’s move to put the UK’s credit rating on negative watch.  This has caused GBP/EUR to retreat from its highs back to the 1.2000 level and cable is a little softer at 1.5660. The single currency is holding onto the 1.3000 level against the dollar as it trades at 1.3050 at the time of writing. 1.3000 is the crucial support level over the near term and a break below here could lead to a test of 1.2980/70.  To the upside near term resistance is seen at 1.3090, 1.3120 and 1.3155.

Gold continues to suffer in the face of a strengthening dollar and yesterday the yellow brick hit a 2 month low.  Concerns over the situation in China has weighed on the miners as mentioned above and this is also taking its toll on metal prices.  This morning gold is finding a little bit of support around 1645 as it trades at 1647 at the time of writing.

Brent's recent strength has also been kept in check by a general halt in the move higher by commodity markets.  With equity markets still remaining quite strong the price of crude has yet to retrace in any major way, and at the time of writing Brent is at 124.65.

This comment is from Capital Spreads.

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