In putting the sovereign debt ratings of 15 Euro-zone countries on negative watch yesterday, Standard & Poor’s Rating Services showed a particularly impressive sense of timing. The rating action punctured some of the enthusiasm building in the market for Friday EU summit, where Germany and France are expected to spearhead a move towards greater fiscal integration in the union.
With nothing major on the U.S. economic calendar, there will likely be no distractions from developments in Europe today, with S&P’s rating action front and center in market action. On the positive side, the threat of en-masse Euro-zone rating downgrades has the potential to rally the countries around the Franco-German proposal in Friday’s summit meeting.
The bond markets had long suspected France of being at risk of losing its coveted triple-A. As such, the inclusion of France in the S&P’s list was not much of a surprise. But the inclusion of Germany in the list, an otherwise pristine credit, feeds investors’ anxieties that the unsettled crisis is seeping into the Euro-zone core. On a substantive level, the rating action threatens the credit profile of the European Financial Stability Facility (EFSF), the rescue fund. Will the EFSF be able to sport a triple-A credit profile if its sponsors and guarantors have weaker ratings?
The rating action’s impact is more in terms of investor psychology than actual pricing action. After all, the S&P’s downgrade of the U.S. credit profile did little to dent the value of treasury instruments. Yields on 10-year U.S. treasury bond has lately been in the 2% vicinity, down from the roughly 2.5% level before the S&P’s summer downgrade. On the positive side, the threat of en-masse Euro-zone rating downgrades has the potential to rally the countries around the Franco-German proposal in Friday’s summit meeting.
In corporate news, we have a solid earnings and revenue beat from Toll Brother (TOL), the luxury homebuilder. In wireless spectrum sale and purchase action, Leap Wireless (LEAP) purchased spectrum from Verizon Wireless (VZ) around Chicago and sold the national carrier spectrum around other markets.
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