–Likelihood Could Cut Rating on US Within 2 Years ‘At Least’ 1-In-3
–Affirms US ‘AA+’ Credit Rating, Outlook Remains Negative
–Stresses U.S. Needs Credible Medium-Term Fiscal Plan

By Brai Odion-Esene

WASHINGTON (MNI) – Rating agency Standard & Poor’s Friday warned
that continued fiscal and political risks in the United States could
build to a point that it could downgrade the nation’s sovereign credit
rating within the next two years.

In a statement released after market hours, the firm affirmed its
‘AA+’ rating on the U.S., citing strengths that include “its resilient
economy, its monetary credibility, and the U.S. dollar’s status as the
world’s key reserve currency.”

“We believe the Federal Reserve System (the U.S. monetary
authority) has an excellent ability and willingness to support
sustainable economic growth and to attenuate major economic or financial
shocks,” S&P said.

S&P said it believes the risk of the United States returning to
recession is about 20%.

The U.S.’s credit weaknesses include its fiscal performance, its
debt burden, “and what we perceive as a recent decline in the
effectiveness, stability, and predictability of its policymaking and
political institutions, particularly regarding the direction of fiscal
policy.”

S&P maintained its negative outlook on the United States, a
reflection of the rating agency’s opinion that “U.S. sovereign credit
risks, primarily political and fiscal, could build to the point of
leading us to lower our ‘AA+’ long-term rating by 2014.”

The outlook, it added, represents “the likelihood that we could
lower our long-term rating on the U.S. within two years is at least
one-in-three.”

S&P warned that pressure on the U.S. ‘AA+’ rating could build if
the White House and Congress remain unable to agree on “a credible,
medium-term fiscal consolidation plan that represents significant (even
if gradual) fiscal tightening” beyond that envisaged in 2011 Budget
Control Act.

“Pressure could also increase if real interest rates rise and
result in a projected general government (net) interest expenditure of
more than 5% of general government revenue,” it added.

On the other hand, S&P said the rating could stabilize at the
current level with a medium-term fiscal consolidation plan, “or if the
U.S. government makes faster progress toward reducing the general
government deficit than our base case currently presumes.”

S&P said the ability of the administration and lawmakers to
implement reforms has weakened in recent years because of “a sometimes
slow and complex decision-making process,” particularly with regard to
broad fiscal policy direction.

“In particular, we think that recent shifts in the ideologies of
the two major political parties in the U.S. could raise uncertainties
about the government’s ability and willingness to sustain public
finances consistently over the long term,” it said, adding that “we
believe that political polarization has increased in recent years.”

And while the November presidential and congressional elections
could resolve the U.S. fiscal debate, “we see this outcome as unlikely,”
S&P said.

In fact, if the gap between President Barack Obama and Republican
challenger Mitt Romney is close. S&P said the race could reduce
bipartisanship from its already low depths as each party “strives to
rally support by more clearly distinguishing itself from the other.”

Another fiscal issue is the looming across-the-board cuts set to
trigger at the start of next year, but S&P said its current (and
previous) base-case fiscal scenario assumes that the 2001 and 2003 Bush
tax cuts, due to expire by the end of 2012, remain in place indefinitely
and that the alternative minimum tax is indexed for inflation after
2011.

On the expenditure side, its base case assumes Medicare’s payment
rates for physicians’ services stay at their current level, although the
firm also assume the Budget Control Act remains in force. It also
assumes annual real GDP growth of 2% to 3.5% and consumer price
inflation near 2% through 2016.

“Under our base-case fiscal scenario, we expect the general
government deficit, as a share of GDP, to decline slowly, from 10% in
2011 to 9% in 2012 and 5% by 2016,” S&P said, noting that even at 5%,
the deficit would still be at the high end of the ranges it uses to
assess sovereigns’ fiscal performance.

“Under the same base-case scenario, we expect net general
government debt, as a share of GDP, to continue to rise, from 77% in
2011 to 83% in 2012 and 87% by 2016,” it added, “keeping the U.S. at the
high end of our indebtedness range and highlighting the deterioration in
our expectations since last summer.”

And in the absence of significant fiscal policy change, S&P
projected U.S. net general government indebtedness, as a share of the
economy, to continue to increase after 2016.

This is why the rating agency believes the U.S. will likely need “a
more substantial” medium-term fiscal consolidation plan than that
included in the Budget Control Act in order to halt the deterioration in
the government’s net indebtedness as a share of the economy.

Such a plan would need broad support from both parties to be
credible, it said.

“We stress the qualifier “medium-term” because we believe the
fiscal challenges of the U.S. are more structural and recognize that
abrupt short-term measures could be self-defeating when domestic demand
is weak,” S&P said.

Aside from issues at home, S&P said U.S. economic and fiscal
performance is subject to a number of significant risks, including —
not surprisingly — the ongoing crisis in the eurozone.

“These could lower U.S. growth either through a decline in U.S.
exports to the euro area or, more importantly, through second-round
effects on the U.S. financial sector,” S&P said.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MR$$$$,MFU$$$,MCU$$$,M$$CR$,MT$$$$,M$X$$$]

Last Friday, the price in the EURUSD closed at 1.2417. The 100 hour MA closed at 1.2430. The price moved up to meet the moving average in the hour before the close and sold off a little in the last hour. 

 Today with an hour or so left to trade, the price has move higher to meet and move above the 100 hour at the 1.2510 level.   That 100 bar MA is flat (no slope). The price today, fell below the 200 hour MA which should have led to lower prices but it did not. 

What does it say to me? 

• 100 hourMA is higher than a week ago.  Buyers took back some control. Bullish
• Failing on the move below the 200 hour MA today says the sellers had the opportunity to take control.  They could not.  Bullish
• The MAs that are flat says “the market” is unsure.  The market is more balanced
• The fact the price is closing the week for the 2nd consecutive week at the 100 hour MA area says that the market is concerned about weekend risk.   This is the most neutral area the price can close at. The market is neither bullish or bearish at the 100 hour MA. It is happy to let the new week define the bias.

Last Sunday, the price moved lower then moved above the 100 hour MA for the whole week until today.    We will look for the same clues to define risk, using the same tools, the same rules.  If there is a surprise announcement, there will be clues that define risk/limit risk.  For me – like the neutral market – I will take the cue from the clues and simply look forward to a nice weekend and look to rock and roll again in the new week.

Good weekend to all…..

• Hopes rise for Spanish aid request on EU conference call Saturday
• Deputy PM Seanz denies Spain will request aid; says Spain still waiting for banking figures
• US trade deficit dips to $50.1 bln in April from $52.6 bln in April
• Canadian employment rises 7,700; unemployment rate steady at 7.3%
• US wh0lesale inventories rise 0.6%, sales rise 1.1% in April
• Obama: Private sector doing just fine in the US
• Fox Business reports the US is pushing a TARP-style bailout for Europe
• IAEA says talks with Iran failed
• Spanish bond yields rise sharply despite widespread talk of bank bailout; Closes week at 6.25% though Madrid shares rise 1.8%

EUR/USD opened soft and pushed slightly below support at 1.2440 to trigger weak stops before turning high late in the European session. Heavy talk that a Spanish bank bailout could come as early as tomorrow prompted some short-covering. US equity markets opened quite weak but rallied and trade up 0.6% late in the session.

USD/JPY benefited from covering in an array of crosses like AUD/JPY, EUR/JPY and GBP/JPY. It ends the week near 79.50 amid reports of corporate sellers towards 80.00 in size.

GBP/USD dipped toward 1.5400 before rebounding and ending the day in the 1.5460s.

AUD/USD was little changed on the day ahead of a rash of Chinese economic data over the weekend. We trade at 0.9905 late in the NY afternoon.

Family duty calls, so I will leave you for the afternoon. Great weekend to all.

Buy the bailout rumor, then sell the fact.

Should Spain take a small (sub-EUR 50 bln) bailout this weekend, look for a short-lived rally, followed by renewed downside pressure once the market begins to think the move was too-little-too late. That should take place no later than Tuesday, I’d imagine…

EUR/USD reaches 1.2517 on short-covering.

Next resistance is at 1.2530, the 50% retracement of the 1.2625/1.2435 slide.

• Employment data today was modest
• Concerned about relative US weakness

I got one thing right early this week. I said that the easy money had been made for the EUR/USD downtrend.
we’re now back to a more typical market where a biog group continues to press the longer-term trend while a similarly sized group tries to take advantage of the counter-trend retracements.

We’re no getting back to the point where we’re trading retracements within retracements, a more “normal” market dynamic.

EUR/USD managed to trip a few stops above 1.2500 but has stalled just shy of the 38.2% retracement of the drop from 1.2625 to 1.2435. That comes in at 1.2507.

Breaks above 1.24948. 100 hour MA the next target at the 1.2510 level (Stops likely above that level). 

Contributing to the move is ECB’s Constancio says Spain to formally request aid for banks hopefully soon. This is being reported on Portugal radio.  When he was asked if aid can come on Saturday, he responded that “anything is possible”.

As we feared, rebuilding will stretch already thin Italian financial resources. Markets will likely be fairly forgiving so long as quake relief does not stray off on a tangent and become a catch all for a renewed government spending splurge.

EUR/USD holding below resistance at 1.2500 with most of Europe transfixed on soccer.

–No Monetary Action Expected At Next Fed Meeting
–55% Probability of Departure(s) From The Eurozone
–If Greece Exits Euro, Expect Significant Effort To Prevent Spread

By Brai Odion-Esene

WASHINGTON (MNI) – The threat of the looming “fiscal cliff” in the
United States is a major risk and will likely have a negative impact on
economic and job growth next year, a panel of U.S. bank economists
warned Friday.

In a presentation of its economic forecasts and monetary policy
predictions, the Economic Advisory Committee of the American Bankers
Association also said it expects the Fed to adopt a “wait and see”
approach following the meeting of the Federal Open Market Committee on
June 19-20.

The ABA forecast real GDP to grow by 2.2% this year, and then dip
to a 2.0% growth rate in 2013.

Next year “will likely be weighed down by fiscal uncertainties,”
George Mokrzan, committee chairman and Huntington Bank chief economist,
said during a press conference to present the forecasts.

“As a result, our forecasts are probably a little bit more modest
maybe than some,” he said. “If we were not encountering this fiscal
cliff in 2013, then maybe the forecast would have been considerably
higher.”

Mokrzan noted that growth in real disposable income has been “quite
modest,” which could be a problem if there is a shock to the economy.

The ABA panel’s forecast for the unemployment rate centered around
8.1% in 2012, and 7.8% next year. Non-farm payrolls are projected to
average 173,000 in 2012 and then decline to 159,000 in 2013.

Asked by MNI if the projected slowdown in payroll growth is also
due to the fiscal uncertainty expected to weigh on economic activity,
Mokrzan noted that payroll growth, in some sense, is a lagging indicator
of GDP.

“We are seeing some more modest GDP growth,” he said. “That’s why
the labor market, employment growth is generally coming down at a little
bit slower pace.”

The ABA panel said it is forecasting a 55% probability that there
will be a departure — or departures — from the eurozone in the next
year. Another forecast sees a 20% chance of a recession in the U.S. this
year and a 28% chance in 2013.

Mokrzan said it is the general view of the committee that if Greece
does leave the euro, “it would likely be the case that there would be
significant policy response in Europe, to put up firewalls essentially,
and prevent the crisis from spreading.”

He added that in his opinion, it is not necessarily a “done deal”
that Greece will leave the eurozone, citing the enormous costs
associated with such a move.

Still, “the committee views that in general that would be the
primary mechanism — whereby a disturbance in Europe would actually
impact the U.S. economy,” Mokrzan said.

The committee said monetary policy will continue to “strongly
support economic growth for the foreseeable future,” and given the
expectation that inflation will hold near 2% this year and the next,
they forecast the federal funds rate to average 0.13% through the second
quarter of 2013.

On whether the Fed will engage in additional monetary easing
following its meeting in two weeks, Mokrzan noted that with growth
growth and inflation subdued, “the committee doesn’t think the Federal
Reserve is likely to do any further type of monetary actions of a ‘QE’
type nature.”

He did add that some on the panel had raised the possibility that
the Fed’s $400 billion ‘Operation Twist’ program might be extended, but
“that’s the minority view.”

So long as the economy remains on a firm footing, with moderate
growth, “the overall view is that we are pretty much status quo in terms
of monetary policy,” he added.

Mokrzan cautioned that this outlook is conditional on the eurozone
debt crisis being contained, and some at least “gradual but substantive”
action on U.S. fiscal policy.

Scott Anderson, senior economist at Well Fargo, told MNI following
the press conference that, further out, the most pessimistic members of
the panel thought the fiscal cliff and eurozone crisis could combine —
in terms of the timing — and have a significant impact on growth.

“Most economists think if growth slows below 2% for a quarter that
would be a trigger for the Fed to do maybe another round of quantitative
easing,” he said. “So we certainly saw the possibility of that
happening.”

If this happened, most believed it would come in the form of
purchases of mortgage-backed securities — with a size of around $500
billion, Anderson said.

That requires growth to “materially slow,” he added, and while
there is some weakness being seen in economic data, it is not enough for
the Fed “to move substantially on another quantitative easing program.”

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MFU$$$,M$X$$$,M$$CR$,MK$$$$]

Is there a team handball game on or some other silly European game?

Traffic from the Continent takes a dive…

• No progress on talks

Oil slightly firmer after the comment but still down $1.80 at $83.00 on the day.

The USDJPY is behaving nicely.  Held 38.2% earlier and now found sellers against an old high from May 29th (couldn’t quite take a run at the highs made yesterday).  Looking at the 5 minute chart, the price broke intraday trend line support but has the 38.2% of the move up to contend with. This also corresponds with the ceiling from earlier today.  Nice support level for the pair.  Look for buyers against the level.

–US and Europe Both Need Growth Now, Long-Term Spending Cuts Later

By Denny Gulino

WASHINGTON (MNI) – Global weakening, Europe problems and U.S.
challenges are simultaneously dampening demand and too much austerity
now will only make a “downward spiral” worse, President Obama said
Friday.

In a mini-news conference after a brief statement that included
advice to European leaders to act now to strengthen weak banks, Obama
warned that Republican budget plans would cost jobs and prolong recovery
– at the same time saying now is not the time to debate politics, but
to help the economy.

“If, when an economy is still weak and a recovery is still fragile,
you resort to a strategy of ‘let’s cut more,’ so that you’re saying
government layoffs, reductions in government spending, severe cutbacks
in major investments that help the economy grow over the long-term,” he
said, “you can get on a downward spiral where everybody’s pulling back
at the same time.”

That, he said, “further crimps the desire of companies to hire more
people. And that’s the pattern Europe is in danger of getting into.”

With some European unemployment rates already in double digits and
austerity making them go higher, “that actually makes it harder for them
to pay off your debts,”

The downward spiral of austerity programs creating the need for
even more austerity is then amplified by the reaction of the markets, he
said. Markets “respond when they see this kind of downward spiral
happening,” he said. “They start making a calculation, well, if you’re
not growing at all, if you’re contracting, you may end up having more
trouble paying us off, so we’re going to charge you even more, your
interest rates will go up, and it makes it that much tougher.”

European leaders can’t move rapidly, he said, because of all the
different parliaments and parties that are involved in decision making.
In the United States, he suggested, he is having enough trouble dealing
with just one Congress, But on both sides of the Atlantic, the strategy
of growth now, spending cuts later, is the best one, he said.

“I think that what we want both for ourselves but what we’ve
advised in Europe as well, is a strategy that says, let’s do everything
we can to grow now even as we lock in a long-term plan to stabilize our
debt and our deficits,” he said.

“Let’s not underinvest,” he said, “in things we need to do right
now to grow.”

The U.S. has been creating jobs and “the private sector is doing
fine,” but state and local government cutbacks and a weak construction
sector are the main challenges, Obama said.

In his opening statement, Obama said European leaders understand
the urgent need to act, specifically to inject capital into weak banks.
For Greece, with new elections coming up, “the Greek people also need to
recognize their hardships will likely be worse if they choose to exit
from the euro zone,” he said.

He praised Germany and France, under its new president, for
“working to put in place a growth agenda alongside a responsible fiscal
plans.”

He said about Europe, “The solutions to these problems are hard,
but there are solutions. The decisions required are tough but Europe has
the capacity to make them, and they have America’s support.”

“Their success is good for us and the sooner that they act, and the
more decisive and concrete their actions, the sooner people and markets
will regain some confidence and the cheaper the costs of cleanup will be
down the road,” Obama said.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MK$$$$,M$$CR$,MGX$$$,M$S$$$,M$X$$$,MT$$$$]

• Cancels three-month bill auction scheduled for June 13
• Cites lack of specific funding need for cancellation

Bloomberg headlines.

Better to cancel an auction because you don’t need the cash than because you can’t sell the bills…

BRUSSELS (MNI) – The Spanish government on Friday sought to dampen
expectations that it would formally request financial aid to help
recapitalize its banking sector as soon as this weekend, but it
acknowledged that it was contemplating the possibility of seeking
outside help.

“Right now the government is working with the IMF and the
evaluators about the figure that would be needed by the financial system
to carry out a complete reorganization of the sector,” Spain’s Deputy
Prime Minister Soraya Saenz de Santamaria told Spanish media.

“No decision has been made in any sense and you have to respect the
process and wait for the reports of the IMF and independent auditors”
she said, adding that “at the moment” no meeting of Eurozone finance
ministers or other officials has been scheduled for Saturday as some
news agencies reported earlier today.

According to Spanish business daily Expansion, Saenz de Santamaria
then went on to clarify that the government would “at least have to wait
for the IMF report,” expected on Monday.

According to press leaks, the International Monetary Fund is
expected say Spanish banks need just under E40 billion in fresh capital,
substantially less than some estimates.

The independent auditors’ reports commissioned by Madrid, being
conducted by consultancies Oliver Wyman and Roland Berger, are due on
June 21. That is four days after a second round of elections in Greece,
and some analysts and officials consider it risky for Spain to wait that
long because of its vulnerability should the Greek result lead to panic
in the financial markets.

The comments by Saenz de Santamaria echoed remarks from the
European Commission on the same day that no request for aid had been
made but that “should there be, the appropriate instruments are in place
and ready to be activated according to the agreed guidelines.”

European Central Bank President Mario Draghi and the European
Commission said this week that in order to be credible, clarity on the
precise needs of Spanish banks was needed before talks could begin. But
some EU and Spanish officials are understood to be pushing for swifter
action – and an impressive headline figure – to calm jittery markets,
the Financial Times reported Friday.

If Spain were to request aid over the weekend, a quick decision
could be made even without the assessments of the IMF and independent
consultants, one EU official said.

The EU’s bailout fund could also be mobilized “quickly” because
most officials already agree that Spain meets the requirements to
qualify for the kind of lighter aid package being sought by Madrid.

The key conditions are compliance with the EU’s state aid rules and
evidence that the country must be able to show its commitment to sound
fiscal policies.

“Spain is okay in terms of meeting its commitment to the stability
and growth pact targets,” the official said.

Earlier this week Spanish finance minister Luis de Guindos met the
EU’s competition commissioner, Joaquin Almunia in Brussels.

Pressure is mounting on the Eurozone’s fourth-largest economy to
accept outside aid to help recapitalize its struggling banks, but Madrid
has so far publicly resisted such calls because it wants to avoid the
stigma and onerous conditions to which Greece, Ireland and Portugal have
submitted.

Under the rules of the European Financial Stability Facility, the
EU’s current bailout fund, Spain could receive a lighter set of
conditions if Eurozone governments judge that Madrid is pursuing the
right policies.

EU officials in recent days have been arguing that Spain is doing
just that, dismissing comparisons with bailed-out Ireland, thus possibly
laying the ground for such a decision.

The rules of the EFSF and its successor, the European Stability
Mechanism, which is expected to start in July, allow them only to lend
to states and not directly to banks as some policymakers have urged.

Under one plan being discussed by European officials, aid could be
funneled to Spain’s bank restructuring authority FROB. Although this
would reinforce the message that the aid is only for Spain’s banks and
that the government is solvent, the impact would be the same on Spain’s
overall debt level, analysts from Barclays Capital said in a note on
Friday.

Barclays estimates Spanish bank’s capital shortfall at between
E70-80 billion, while rating agencies Fitch and Standard & Poors have
said up to E90-100 billion may be needed.

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

[TOPICS: M$$CR$,MGX$$$,M$S$$$,M$X$$$,MT$$$$]

I’ll Have Another, which won both the Kentucky Derby and Preakness, has been scratched from tomorrow’s Belmont Stakes.

That will make it 34 years since the last Triple Crown.

Bummer…

Sellers are scattered all the way up to the 1.2500 level but there are a few stops just above that level.

EUR/USD underpinned by hopes of a broader bank bailout than one just for Spain. Where the money would come from is a story for another day, apparently…

The EURUSD is getting a continued boost and tests the 38.2% retracement target at 1.24873. The 200 hour MA at the 1.2495 is not far above. I would expect sellers against the levels on the first test, with stops on a move above. 

On the hourly chart, the price fell below the 38.2% of the move higher from June 1 at the 1.24948. This increases the importance of the level on a test (at 1.2495).

That’s what the White House is pushing, according to Charlie Gasparino at Fox Business.

TARP injected capital into US banks during the financial crisis before heading off on a tangent and being used for GM, etc…