Markets resilient to Italy ratings cut
Weak Chinese economic data and a ratings downgrade for Italy had a limited negative impact on Monday, with markets still enjoying a lift from Friday's better than expected US jobs report.
Fitch cuts it rating on Italy one-notch to BBB+, citing the inconclusive election last month and the ongoing recession, one of the deepest in Europe. Italy's CDS spreads widened modestly in reaction to the downgrade.
S&P already rates Italy BBB+ and Moody's rates the sovereign one-notch lower at Baa2, so it was no surprise to see only a small move in spreads. Italy was trading 9bps wider at 265bps, some way off the 295bps level seen after the election.
China, unlike Italy, isn't suffering from a recession, but its recent economic path has been uneven by its usual high standards . Further evidence emerged over the weekend that the Chinese economy is stuttering.
Inflation in February was at a 10-month high, while consumer spending and factory in China output were lower than expected. This was unwelcome news, but its impact was small in a market basking in the glow of Friday's bumper US non-farm payrolls report.
Looking ahead, the economic calendar for this week is relatively light, so we may see a renewed focus on Italy's political machinations. In the cash market, we may see issuance begin to pick-up in the US as the blackout period comes to an end. Activity in the CDS world should increase ahead of the index roll next week.