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Are credit rating agencies losing some of their punch?

These are stories Report on Business is following Tuesday, July 24, 2012.

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Agencies in spotlight
Are the world's credit rating agencies losing some of their punch?

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Germany today is clearly not pleased with the decision by Moody's Investors Service late yesterday to lower its view of the country's fortunes. And the euro zone crisis continues to rage in bond markets - Spanish and Germany yields rose today - but stock investors appear to be taking the latest ratings move in stride.

Part of that is due to better economic numbers from China, but, said chief market strategist David Jones of IG Index, "it's fair to say that the musings of credit agencies have lost some of their impact throughout this European crisis, as some believe them to be behind the curve."

As The Globe and Mail's Brian Milner writes in today's Report on Business, Moody's hit at the very core of the euro zone, changing to "negative" from "stable" its view of the triple-A ratings of Germany, Luxembourg and the Netherlands.

The U.S. agency cited the mounting crisis in the 17-member monetary union, the possibility of Greece quitting the group, and the potential for Spain and Italy requiring bailouts.

Germany's finance ministry responded today, stressing its "solid economic and financial policy" and pledging to protect its ratings.

The common currency itself also came through the Moody's announcement largely unscathed.

As Adam Cole of RBC in London noted, Germany no longer has a "clean sheet" across the three major agencies, which also include Standard & Poor's and Fitch.

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S&P had taken a similar approach in December, but quickly returned Germany to "stable" early this year.

"A statement from the German Finance Ministry described the risks Moody's cites as 'not new' and it is hard to argue with this," Mr. Cole said.

None of this is to suggest that Moody's is necessarily wrong.

There are extreme fears that Spain, which has already arranged a bank bailout, will require life support as its bond yields spike and its economy erodes further.

And many now talk openly of Athens being forced to quit the euro zone. Today, inspectors from the European Union, European Central Bank and International Monetary Fund, known as the troika, are in Athens to check up on how the country is doing with its fiscal targets.

There are suggestions that the troika is losing patience with Greece, which should come as no surprise, but its ability to survive is tied to the troika.

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"Greece appears to be coming up short on budget targets, reforms and asset sales, increasing concern that the bailout money could be cut off," said Benjamin Reitzes of BMO Nesbitt Burns.

"We'll have to wait for the verdict from the troika, but it's unlikely the IMF or Europe want to provide any more money for Greece."

Manufacturing improves in China
China's factory sector is on the mend, though still weak.

A flash purchasing managers index from HSBC/Markit came in today at 49.5 for July, up from 48.2. The 50 mark separates expansion from contraction, so the latest reading shows improvement but "the recovery could not yet be described as strong," said Qinwei Wang of Capital Economics in London.

"The headline PMI, though still below 50, has reached its highest level since February," he said. "The breakdown shows that the improvement was broadly based - four of the five components used to construct the headline index made positive contributions."

Rogers dips
Rogers Communications Inc. today posted a 2-per-cent dip in second-quarter profit, to $400-million or 75 cents a share diluted, as the cable giant faced stiffer competition in its key businesses.

That compared to a profit of $410-million or 74 cents a year earlier, The Globe and Mail's Rita Trichur reports.

Revenue was flat at $3.1-billion.

"Our revenue and adjusted operating profit growth in the second quarter was highlighted by strong postpaid wireless smartphone sales and customer retention metrics, as well as exceptionally strong margins in both our wireless and cable businesses," said chief executive officer Nadir Mohamed.

Toyota boosts production
Toyota Motor Manufacturing Canada Inc. will spend $100-million to expand production of the Lexus RX350 luxury crossover utility vehicle in Cambridge, Ont., The Globe and Mail's Greg Keenan reports.

The move will create 400 jobs as the Cambridge plant produces all RX350 vehicles for the North American market by 2014. At the moment, North America is supplied by both the Cambridge plant and a plant in Japan.

Retail sales up
Canadians are opening up their wallets to some extent, led by shopping for food.

Retail sales rose 0.3 per cent in May, according to Statistics Canada today, but when you strip out car sales the overall showing was a gain of 0.5 per cent, better than expected.

And in straight volume terms, sales rose 0.7 per cent, The Globe and Mail's Ora Morison reports.

Sales rose in six of the 11 sectors measured by the agency, accounting for 53 per cent of total sales.

"Over all, a quite healthy report, perhaps enough to nudge our estimate for May GDP up a tick to 0.3 per cent," said chief economist Avery Shenfeld of CIBC World Markets.

But, said chief economist Krishen Rangasamy of National Bank, the Canadian consumer remains "subdued."

"Consumer weakness likely extended to the second quarter, after the sub-1-per-cent Q1 growth in real consumption spending. Looking ahead, consumption spending is likely to remain soft considering that consumer credit growth (year-on-year) is the lowest in almost two decades and the savings rate is at its lowest in five years. That said, for May, the healthy retail volumes combined with earlier reported strength in wholesaling should help lift the month's GDP by around 0.2% (month-on-month)."

UPS trims outlook
Here's a sign of the times: United Parcel Service Inc. has cut its forecast for the year amid the uncertainty in the United States, China and Europe.

UPS results are widely watched as something of a barometer of the global economy.

The company today trimmed its outlook for earnings per share to between $4.50 (U.S.) and $4.70 for 2012. That's down from $4.75 to $5, though would still mark a gain of between 3 per cent and 8 per cent over last year.

"Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion," said chief executive officer Scott Davis.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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