Group of Seven finance ministers and central bank governors released a statement Sunday, affirming their “commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.” G-7 officials outlined their plan to ensure liquidity, support financial market functioning, financial stability, and economic growth. A similar statement was released by the Group of 20, which also includes emerging markets.
Investing Insights: Is the Debt Ceiling Raise Bullish for Gold?
The statement was released late yesterday European time in order to head off today’s markets after Standard & Poor’s (MHP) downgraded the U.S. credit rating late Friday. Italy (EWI) and Spain (EWP) continue to face their own sovereign debt problems, with the European Central Bank entering into a bond-buying session that could reach $1.2 billion, a very controversial move that could create a “common debt instrument” for the euro zone, a U.S.-style federal fiscal union joining euro zone nations. While controversial, the move is seen as necessary in order to prevent the collapse of two major European economies that have been weighing down markets and the euro. Since July 26, equity markets have declined $5.4 trillion, with investors fleeing to Treasuries and gold in both the U.S. and abroad.
Despite the S&P downgrade, U.S. Treasuries have gained, pushing the yield on the 10-year note down five basis points to 2.51% and the five-year yield down seven basis points to 1.18%. Meanwhile, Asian and European stocks continued to decline Monday, overshadowing the rally in financial shares resulting from the ECB’s buying Spanish and Italian debt. The yen continued to rise against the falling U.S. dollar, euro, and a host of other currencies despite efforts by the Japanese government last week to slow its growth to prevent its hurting exports, and in turn the country’s recovery efforts. While the debt crisis in Europe has pushed yields on Italy’s 10-year notes from 4.6% to 6.1% in two months, and Spain’s yields as high as 6.29%, up from 5.14% in March, yields began to fall off last week’s record highs as the ECB entered the market.
As the ECB begins to “actively implement” its bond-buying program, it calls on euro-zone governments to allow the European Financial Stability Facility to buy bonds on the secondary market as agreed upon in July. The ECB expects to buy up to half of all Italian and Spanish traded debt. Meanwhile, sovereign investors from both Europe and Asia have expressed their confidence in U.S. government debt since the S&P’s decision to downgrade. Japan, the second-largest investor in American debt after China, sees no problem with continuing to invest in American securities, and may need to purchase Treasuries in order to weaken the yen. Russian Deputy Finance Minister Sergei Storchak has affirmed that his government will also continue to invest in U.S. Treasuries as usual, and that the cut has little to do with a long-term investment strategy. Russia is a G-20 member country and one of the 10 largest foreign investors in U.S. government debt.
The U.S. Treasury has also spoken out against the S&P (MHP) downgrade, saying that the agency based its decision on flawed estimates placing discretionary spending levels $2 trillion above what the Congressional Budget Office’s own estimates, though S&P maintains that those figures didn’t ultimately weigh into its decision. Both Moody’s Investors Service (MCO) and Fitch Ratings maintained the country’s AAA credit rating on August 2, the day President Obama signed the bill ending the debt-ceiling impasse. Both agencies will reassess their decisions at a later point, with a downgrade still on the table should the economy continue to weaken.
While foreign investors aren’t taking much stock in the S&P downgrade, when coupled with declining markets, the news has American consumer confidence waning. According to Mark Spindel, chief investment officer at Potomac River Capital, “The downgrade mattered less. It is the path we have taken to get here: the meager recovery, the dysfunctional political environment, and the pathetic growth in employment, consumption and income that don’t seem to be moving back to sustainable levels.” According to a survey from Thomson Reuters and the University of Michigan, consumer confidence fell last month to its lowest level since March 2009. Consumer spending accounts for 70% of the U.S. economy.