Risk Retreats Following Moody's Downgrades And Warnings

At the end of today's NY trading session Moody's announced that it was cutting the debt rating of six European nations including Italy and Spain, and put France, Austria and the UK on negative outlook.

From Bloomberg: 'The uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework,' and the resources that will be made available to deal with the crisis, are among the main drivers of Moody's action, the ratings company said.'

Moody's said Europe's 'increasingly weak macroeconomic prospects' threaten the 'implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness.' It said market confidence 'is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.'

While the action against Italy, Spain, and France follows downgrades by Strandard & Poor's one month ago, the focus on the UK is new for the big 3 rating agencies.

From FT: 'Moody's said in a statement: 'The primary driver underlying Moody's decision to change the outlook on the UK's [triple A] rating to negative is the weaker macroeconomic environment, which will challenge the government's efforts to place its debt burden on a downward trajectory over the coming years.'

It added that the UK was vulnerable to the eurozone and that its outstanding debt placed it among the most heavily indebted of its triple A-rated peers.

'Although the UK is outside the euro area, the high risk of further shocks, economic, financial, or political within the currency union are exerting negative pressure on the UK's [triple A] rating given the country's trade and financial links with the euro area.'

The news undercut risk sentiment and caused a strong gain in favor of the USD and JPY in late NY trading and at the start of the Asian session, with the EUR and GBP softening. The declines and move towards risk aversion follows the news over the weekend that the Greek Parliament had voted for austerity measures that bring it one step closer to receiving bailout funds from the troika - EU, ECB, IMF - which had bolstered risk sentiment at the start of the weekend, though much of that sentiment had faded as the NY session progressed.