Moody's cut Spain's credit rating by one level to Aa1, and set the outlook to stable, which is not news since this was widely anticipated for some time. If anything, bulls could be encouraged by the stable outlook as announced by the company, and the fact that the cut was only one notch, instead of the anticipated two notches. Ireland has also announced that, although this year's deficit will be a massive 32% of the the budget due to the bank bailouts, it is still committed to reducing the deficit to 3% by 2014.

Stock markets in Europe and Asia were lower today, and North America was in the red as this was being written. Gold is still consolidating, after breaking a record at $1313, while the Euro is lower at around at 1.36, seemingly comfortable at its present levels. Japan did not intervene in the FX market today, but others, such as Singapore and Indonesia were active as usual selling their currencies in order to prop up the USD. The large fall in the Japanese stock market was attributed to worries about the European sovereign debt situation, but we suspect that bilateral issues with China, including the recent concern about a Chinese ban on crucial rare earth element exports, may lie behind the move. Japan industrial production numbers showed -0.3% contraction, while a 1.1% improvement was anticipated.

The U.S. House passes the China bill, Chinese officials react by fixing the Yuan lower

The U.S. House of Representatives passed the China bill yesterday night by a vote of 348-79, granting U.S. companies the right to complain to the Commerce Department against Chinese policies, which may lead to the imposition of tariffs. The bill still needs to be addressed at the U.S. Senate, and in comments yesterday Senator Chris Dodd expressed his view that it would be unlikely to have any China bill passed in the Senate this year, but he added at the same that legislation on this issue will be a theme for the future because of existing bipartisan support, and the government's frustration at Chinese inaction. And while the administration did not explicitly endorse the bill, it cannot be too unhappy at being afforded a new tool with which it can pressure the Chinese towards appreciation.

Meanwhile, the Chinese have been fulminating at the U.S. bill, with officials expressing strong and firm opposition during the Asian session. The Commerce Ministry Spokesman, Yao Jian, commented that the bill is in violation of WTO regulations, noting that conducting anti-subsidy investigations is against the organization's rules. The spokesman added that China has "never undervalued the Yuan to gain a competitive edge", which is of course correct, since the currency has been barely moving for two decades.

The Yuan was set at 6.7011 today, at a slightly higher level than yesterday's fix. Also, yesterday the HSBC China PMI was released at 52.9 showing that the Chinese economy is still growing. The Chinese will be off from Friday to October 8^th for the National Day Holiday.

Janet Yellen receives approval of her nomination to the FOMC

Janet Yellen, the previous San Francisco Fed chief, and a well-known dove, was confirmed yesterday by the U.S. Senate as the replacement for Donald Kohn. As far as the argument on QE2 is concerned, this appointment does not change much, since Donald Kohn has been one of the driving forces behind the Fed's policies for many years, and he's as dovish as any other member of the committee. Still, the market will probably interpret this as a confirmation of a Fed bias towards easing, as Mrs. Yellen has been more concerned about growth than inflation since the beginning of the downturn.

German unemployment falls by a large margin

Germany's unemployment rate was released today at 7.5%, seasonally adjusted, from previous 7.6%, showing a surprisingly strong performance in the labor market. The German economy has been doing rather well over the past year, and it looks like the strength in the manufacturing sector is now spreading to the services sector too.

Meanwhile, Portugal has been announcing new austerity measures, including, most significantly, a 2% rise in VAT, and 5% cut in public wages. CDS generally rallied in reaction, with Portugal tightening by 20 bps, but we note the rumors about discrepancies in Spanish GDP reporting during the past three years circulating in the market.

In sum, today has seen a mixed performance, with credit markets rallying, whilc stocks lost some value. It will be interesting to see how the upcoming NFP release will impact the market's ebullient mood.