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March 31, 2023

European stocks fall on Moody’s US credit rating warning

Gold price hits all-time high. Tense talks on debt ceiling between US President and lawmakers, Obama reportedly saying he would risk his job for a deal. Italian Senate passes austerity package.

European stocks fell sharply yesterday, as the threat of a credit-rating downgrade to the world’s largest economy, rising borrowing costs for Italy and a call for a vote of confidence on budget cuts in the Italian Senate put investors on edge, The Wall Street Journal reported. At 1030 GMT, the Stoxx Europe 600 index was down 0.9 percent at 267.38, London’s FTSE 100 was 1 percent lower at 5848.47, Frankfurt’s DAX was off 0.8 percent at 7217.85 and Paris’s CAC-40 was down 1.1 percent at 3750.86.

The price of gold also rose to a fresh all-time high of USD 1,594.16 an ounce, before easing to USD 1,590.66, BBC News said. Gold is seen as the number one haven purchase in times of economic uncertainty, but analysts said its rise was also caused by the fall in the dollar.

Against the Japanese currency the dollar fell to 78.45 yen at one point, its lowest level since March, before recovering to 79.00 yen. The dollar also declined against the European single currency, down 0.2 percent to 0.70430 euros. The greenback also fell slightly against the pound, with sterling rising 0.1 percent to USD 1.61240.
And Asian stock markets were mixed. Japan’s Nikkei Stock Average fell 0.6 percent, Australia’s S&P/ASX 200 slid 0.9 percent and South Korea’s Kospi Composite lost 0.9 percent. Hong Kong’s Hang Seng Index was down 0.8 percent, while China’s Shanghai Composite edged up 0.1 percent, helped by strength in gold stocks.

The moves came after ratings agency Moody’s said it may cut the debt rating of the US, warning there was a “rising possibility” it will default. Moody’s has said it may cut the US AAA debt rating, citing the “rising possibility” the US could default on its debt obligations. The agency warned the likelihood the US would fail to raise its statutory debt limit in time to avert default was low but not insignificant.

The warnings came on the fourth-day of talks in Washington between US President Barack Obama and lawmakers, which reportedly ended on a tense note with House Majority Leader Eric Cantor and Obama squaring off over the Republican’s call for a short-term extension of the federal debt ceiling, according to CNN. Multiple sources speaking on condition of anonymity said Obama told the gathering that “this could bring my presidency down,” referring to his pledge to veto any short-term extension of the debt ceiling. Sources say he vowed, “I will not yield on this.” The exchange concluded almost two hours of talks that failed to achieve a breakthrough. A fifth round of talks was expected yesterday.

Cantor told reporters after Wednesday’s meeting that he proposed a short-term agreement to raise the federal debt ceiling, a position Obama has previously rejected. “That’s when he got very agitated and said I’ve sat here long enough – that no other president – Ronald Reagan – would sit here like this – and that he’s reached the point that something’s gotta give,” Cantor said, adding that Obama called for Republicans to compromise on either their insistence that a debt-ceiling hike must be matched dollar-for-dollar by spending cuts or on their opposition to any kind of tax increase.

On the other hand, Democrats are accusing Cantor of having a conflict of interest in the debt ceiling debate, according to ‘Huffington Post.’ The resolution goes after Cantor’s investment in a fund that “takes a short position in long-dated government bonds.” The fund is essentially a bet against U.S. government bonds. If the debt ceiling is not raised and the United States defaults on its debts, the value of Cantor’s fund would likely increase, the publication said.

Italy’s government bond yields hit record high

Meanwhile, Italy successfully sold its latest issue of government bonds, but it had to offer the highest returns on record to ensure they were all purchased, BBC News said. The new 15-year bonds offer a yield of 5.9 percent, an all-time high for Italian bonds of that duration.

Five-year bonds were also released, with a yield of 4.9 percent, the biggest since June 2008. Demand for these was double the release. The sale raised a total of EUR 2.97 bln. Financial analysis group Forex said the share sale would do little to boost confidence in Italy’s finances.

Yesterday, the Italian senate approved the tough austerity budget, which proposes cuts of EUR 48 bln over three years. The package was passed with 161 votes in favour, 135 against and three abstentions. A final vote is set in the lower house today.

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