Markets Fall as Pressure on Europe Increases

Oct. 19, 2011 - PRLog -- The plan to increase Europe’s stabilization fund, which is based on guarantees on part of the debt of problematic Euro zone countries, is threatening France with a downgrade of its credit rating. Speculators are actively investing in the price of 10-year French bonds, which in the current quarter have displayed one of the worst dynamics in the region – the only worse 10-year bonds are Greece’s and Belgium’s. The European Financial Stabilization Fund may possibly be used to cover the first part of losses in the event of a sovereign default. Moody’s Investors Service reported yesterday that France’s rating was under pressure. DT Trading analysts explain that it is because of this that investors’ appetite is currently such that purchases of French bonds require paying a record premium of 93.2 basis points higher than that on yields of German bonds, which are also trading 29 basis points higher compared to their April level.

DT Trading analysts think that a possible French downgrade, in the event that France guarantees the obligations of troubled French banks as was already proposed at the last G-20 summit, will inevitably put pressure on Germany’s rating as well. The presence of even two of the countries with the highest ratings in the group of 17 countries is having a restraining influence on Europe’s centrifugal forces. In other words, France’s and Germany’s ratings are the key factor for the survival of a unified Europe. France should try to maintain a common level for its obligations in order to prevent a downgrade on its creditworthiness.

Today in trading in Asia, China’s economy showed its worst growth dynamic of the past two years after Germany disappointed expectations that it would emerge from the weekend with an inevitable resolution to Europe’s debt crisis. Asian stocks fell from their one-month highs while the Korean won depreciated and copper led the drop among precious metals.

The Asia-Pacific MSCI Index dropped 2.3% at the close of trading in Tokyo, demonstrating the biggest drop in the past two weeks. Futures on the Standard & Poor’s Index added 0.1% after a 0.5% drop. The Euro Stoxx 50 Index fell 1.2%. The Euro rose 0.3% to $1.3777, bouncing back from yesterday’s low. The Korean won dropped 0.5% and the Chinese yuan depreciated 0.1%. Copper fell 1.9% in the second half of the day.

The Nikkei 225 Stock Average fell 1.6%, while the S & P/ASX fell back 2.1% and the South Korean Kospi Index fell 1.4%. The Chinese Shanghai Composite Index fell 1.8% and the Hong Kong Hang Seng Enterprises Index fell 4.6%. Shares of the Industrial and Commercial Bank of China (1398) Ltd, the largest creditor in the world by market value, crashed 6.3% in Hong Kong after China reported stalled GDP growth of 9.1% in the third quarter, compared to 9.5% in the second quarter of this year.

DT Trading Limited Analytical Department

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