Daily Market 6 Dec 2011

Global Markets

Standard & Poor's said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area's six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.
 
Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,? S&P said in a statement. The downgrade warnings come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push for a rewrite of the EU's governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year.

The S&P move is yet another signal that euro area countries must take decisive action to deal with the crisis or else the problems will spread from Greece and others with the most acute fiscal problems to the rest of the euro zone, said Phillip Swagel, a professor of economics at the University of Maryland's School of Public Policy who was an assistant Treasury secretary for economic policy in the George W. Bush administration. It is time for Germany and France to act -- either to save Greece and the others or to let them fail.

Bonds

Treasuries fell for a second day after Germany and France said they want new European Union rules on borrowing limits and penalties for deficit violators to curb the region?s debt crisis.   The plans, including a permanent rescue fund in 2012, support forecasts for yields to rise as the European and U.S. economies improve. Benchmark 10-year rates will increase 36 basis points by June 30, according to a Bloomberg survey of banks and securities companies. Treasuries have fluctuated this year in response to developments in Europe, sending 10-year rates to a record low of 1.67 percent on Sept. 23 as investors sought the relative safety of American debt.

Commodity

Australia, the third-largest wheat exporter, is set for a record harvest and shipments this year after late winter and spring rain boosted yield prospects,
according to a revised outlook from a government forecaster.  Output may total 28.3 million metric tons in 2011-2012, 8 percent more than a September estimate of 26.2 million tons
and compared with last year?s revised record crop of 27.9 million tons, the Australian Bureau of Agricultural and Resource Economics and Sciences said today. Exports may be a record 21.6 million tons, from the 20.4 million tons estimated in September.   A second record Australian harvest may help extend wheat's 23 percent slump this year as global output expands and Russia lifted an almost yearlong export ban on July 1. The grain is heading for its biggest annual decline since 2008, helping to ease global food costs that reached a record in February.

U.S. Supplies
Wheat for March delivery on the Chicago Board of Trade was little changed at $6.1125 per bushel at 8:41 a.m. in Singapore. Futures fell 2.2 percent yesterday, the most in two weeks, on signs that demand is declining for U.S. supplies.    World wheat production will gain 5.3 percent to 683.3 million tons, the second-biggest crop ever, according to the U.S.
Department of Agriculture. Global food costs tracked by a Food & Agriculture Organization gauge, which peaked at 237.68 in
February, fell to 216.1 in October.

Cotton Production
Cotton production in Australia, the third-largest exporter, may reach a record 1.1 million tons, in line with September's forecast, according to the report. Production totaled 898,000
tons in 2010-2011, boosted by rainfall, the bureau said.   Output may surge as much as 25 percent to an all-time high after floods boosted water supplies and spurred record plantings,
producers? group Cotton Australia said last month.     La Nina-linked wet weather brought record rainfall to parts of eastern Australia last year, ending drought and replenishing
dams used for irrigating cotton crops, which are planted in about November and mostly harvest from April.

Canola production is forecast at 2.5 million tons in 2011-2012, up from 2.3 million tons predicted in September. Output may total a record 2.63 million tons, the Australian Oilseeds
Federation said Nov. 15.      The bureau raised its forecast for barley production to 8.5 million tons from 8.3 million tons in September and a revised 8.1 million tons in the previous year.

Currencies

Yen Gains Versus Major Peers as Asia Stocks Drop on S&P Warning.

The yen rose against its major counterparts as Asian stocks declined after Standard & Poor's put 15 European nations on watch for potential downgrades, boosting demand for the currency as a refuge.

The yen gained 0.3 percent to 103.96 per euro as of 10:23 a.m. in Tokyo. It strengthened 0.1 percent to 77.74 against the dollar.