Good morning,

Markets are called to open lower this morning. This is what's happening today:

  • Euro zone ministers – Spanish aid to come from EFSF, then ESM;
  • Manufacturing and jobs reports added to signs of a U.S. economic slowdown. A Federal Reserve Bank of Philadelphia index signaled the worst contraction in manufacturing in almost a year, while existing U.S. home sales fell more than forecast and jobless claims exceeded estimates;
  • Moody’s cut ratings for Credit Suisse AG and 14 other banks, while the International Monetary Fund said Europe’s debt crisis has reached a “critical stage”;
  • Data today forecast to show German business confidence fell this month;
  • 10-year Italian debt is yieding 5.767%, 10-year Spanish debt is yielding 6.744% and 10-year Portuguese debt is yielding 10.15%;
  • Brent is trading at $89.92/barrel.

Markets sold off yesterday in the US. The NASDAQ down 2.43%, S&P500 off 2.22% and the Dow down 1.96% after Moody's downgraded 14 global banks. A downgrade usually means that it becomes more costly for banks to raise money by selling debt. Investors demand higher interest for riskier debt, which is what the downgrades represent. Moody's said it was especially concerned about banks with significant financial markets businesses because those markets have become so volatile.

The latest Moody's report split up the 15 large banks that were downgraded into three main groups:

  • The top group, which had the highest ratings, included JPMorgan, HSBC and Royal Bank of Canada — firms considered by the credit ratings agency to have stable businesses sufficient to offset losses from volatile financial markets businesses;
  • Among the banks included in the second group were Goldman Sachs, Deutsche Bank and Credit Suisse. Moody's said some of these firms still managed risk effectively, even though they rely heavily on their markets businesses to satisfy their shareholders;
  • Group three was for the banks considered to be the weakest, and included Bank of America, Citigroup, Morgan Stanley and Royal Bank of Scotland. Moody's said these banks have either had "problems in risk management or have a history of high volatility," and some of them have implemented business strategy changes.

The cost to protect Morgan Stanley’s debt against losses dropped, and the shares rallied as much as 4.6% in extended trading yesterday after the ratings firm cut the bank by two levels rather than a threatened three grades. Credit-default swaps tied to Bank of America Corp., which was lowered to within two levels of junk along with Citigroup Inc., also improved, along with those of Goldman Sachs Group Inc.

European finance ministers battled over the strategy to contain the debt crisis, with creditor countries resisting leniency for Greece and playing down market concerns about the bailout of Spanish banks.

Lenders of E240b to Greece offered no sign of granting extra time for the newly installed Athens government to meet deficit-cut targets. With Spain set to request as much as E100b to rescue its teetering banks, the officials quarrelled over how to design a recapitalization program that doesn’t scare investors away from Spanish government bonds. The setup of the Spanish package is so politically sensitive that it will be decided by government leaders at a June 28-29 summit.

Stock to watch: Intermediate Capital Group (Price 272.7p, Price Target 320p)

Intermediate Capital Group (ICG) invests in mezzanine finance, leveraged credit and minority equity. ICG has total AuM of EUR 11.4bn, of which 76% are invested on behalf of clients, with the rest funded from ICG's own balance sheet. ICG has a strong brand and top-quartile investment performance. The short-term outlook is uncertain because the Eurozone crisis is likely to result in higher defaults and a tougher backdrop for realisations. However, the group is well positioned for longer-term growth as UK/European banks de-lever their balance sheets. Buy.

For further information on Intermediate Capital Group or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli