Thursday, July 14, 2011 There is no shortage of market moving data this week: earnings season started, Bernanke

puts QE3 on the table, Italy and Spain are being re-categorized as a member of the periphery. Note how Spain and Italy spreads are at the same level as Portugal and Ireland 14 months ago, which is where Greece was about 19 months ago.

USA AAA debt rating placed on watch negative by Moodys Moodys had warned they would do this by mid-Jul if sufficient political progress wasnt made towards a deal in Washington. That progress obviously hasnt occurred (if anything the two sides are as far apart as ever although note that the Boehner comments look like they were mis-quoted late in trading on Wed) and Moodys is following through on its promise. Moody's considers the probability of a default on interest payments to be low but no longer to be de minimisbecause this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range.. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. Moodys S&P has privately warned lawmakers it might d/g the US credit rating if the govt fails to make any of its expected payments (meaning it will d/g even if the Treasury continues to service its debt but fails to make Social Security or other payments). WSJ Munis turning to banks for loans banks increasingly view state and local governments as one of the least risky ways to put to work some of their cash WSJ