The euro recovered from earlier losses made on the back of Standard & Poor’s decision to downgrade Italy from A+ to A.
That was Italy’s first downgrade in five years. Standard & Poor’s attributed the downgrade to weakening economic growth, a fragile government and rising borrowing costs, which make it more expensive to roll over debt and ultimately make it difficult to reduce Europe’s second biggest debt load. In the greater scheme of things Italy’s downgrade isn’t really a surprise, despite many speculating that Moody’s would act first. The euro managed to pare all of its earlier losses by 11am (London time) to trade at $1.3707, representing a 0.25% gain over the previous day’s close. The revival in risk appetite follows a nasty sell-off on Monday and comes on the back of speculation that Fed may unveil another round of QE (dubbed QE3) tomorrow in an attempt to reverse the loss of momentum seen in underlying growth.
The macro environment in Europe isn’t any better and seems to be going from bad to worse, with data released today showing a sharp drop in German investor confidence. The ZEW Centre for European Economic Research said its index of investor and analyst expectations, a forward looking gauge, fell to a reading of -43.3 from -37.6 in August. That was the lowest reading in more than two-and-a-half years. A separate report released this afternoon by the IMF confirmed that the global economic recovery is slowing, with the world economy now forecast to grow at 4% in both 2011 and 2012 as opposed to a prior estimate of 5%. ‘Advanced economies are facing anaemic growth of only 1.6% in 2011’, the IMF warned.