While you were sleeping: Weight of S&P warnings

Wednesday 7th December 2011

Stocks were mixed as investors weighed a round of warnings by credit rating agency Standard & Poor's in two days that would boost borrowing costs throughout the euro zone.

A day after S&P said it might cut the credit ratings of 15 euro zone countries including Germany and France, the agency said it placed the top rating of the region's rescue fund, the European Financial Stability Facility, on negative watch.

"The euro tumbled yesterday on that S&P warning, and we are continuing to see that negative momentum in early New York trade," John Doyle, currency strategist at Tempus Consulting in Washington, told Reuters.

The euro was last 0.3 percent lower at US$1.3365.

In afternoon trading in New York, the Dow Jones Industrial Average was up 0.37 percent. The Standard & Poor's 500 Index was unchanged, and the Nasdaq Composite Index fell 0.44 percent.

In Europe, the Stoxx 600 Index finished the session with a 0.1 percent decline.

Some welcomed S&P's dire warnings. Among them is German Finance Minister Wolfgang Schaeuble, who said these will motivate European leaders to resolve the debt crisis at a December 8-9 summit.

“The truth is that markets in the whole world right now don’t trust the euro area at all,” Schaeuble said today in Vienna, according to Bloomberg News. S&P’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence of global investors.”

Not everyone agreed. An EU watchdog said it was investigating credit rating agencies to look at how they rank sovereign bonds and other debt, Reuters reported.

Officials from the European Securities and Markets Authority have been visiting offices of S&P, Moody's and Fitch, as well as smaller rivals, since the start of November and will continue to do so throughout this month, Reuters said.

Meanwhile, US Treasury Secretary Timothy Geithner arrived today in Europe for talks with some of the region's top officials before the summit. First up was a meeting with European Central Bank President Mario Draghi in Frankfurt, according to Reuters, adding that neither commented afterward.

The European crisis is widely considered a serious threat to global economic growth. S&P today said that EU budget cuts as a result of the fiscal crisis will curtail expansion, forecasting a 40 percent chance that output will decline in the euro zone.

“While the market was not overly shocked by S&P announcements, they do create a sense of urgency for European leaders. The good news is that they are coming up with proposals, but that also raises questions on whether they will be in fact able to deal with them,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia told Bloomberg News.

Some believe further integration is needed to save the common currency. The euro zone needs its own jointly issued bonds, a central fiscal authority and its own tax if it is to survive, Nobel Economics prize winner Christopher Sims told Reuters.

Sims said such changes would also help persuade the European Central Bank to become a lender of last resort for euro zone countries in trouble.

Amid all the efforts to solve the fiscal crisis, there was some good news as German industrial orders for October recorded their best gain since March 2010.

(BusinessDesk)

BusinessDesk.co.nz

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