Markets crash yet again...

Euro plummets on Friday 13th as French downgrade looms

AFPJANUARY 13, 2012

France's President Nicolas Sarkozy addresses his New Year wishes to the Justice representatives at the presidential Elysee Palace Friday. Sarkozy, who is facing a tough re-election battle, will also have to contend with the looming downgrading of France's triple-A credit rating.

Photograph by: Charles Platiau, AFP/Getty Images

PARIS — Standard & Poor's imminent downgrade of eurozone economic giant France's triple-A credit rating sent stocks sliding and the euro plummeting on a grim Friday 13th for the single currency.

In Brussels, EU government sources told AFP the ratings agency had warned members of the bloc that France would be downgraded by one notch, while fellow top-line creditors Germany, Luxembourg and the Netherlands would be spared.

"The Standard & Poor's downgrade (for France) is by one notch," one of the sources said. The credit rating agency had indicated in December that a cut of two notches could have been applied to the eurozone's second biggest economy.

The downgrade could force France's borrowing costs up, at a time when it has already been forced to impose austerity measures to control its deficit, and is a political humiliation for President Nicolas Sarkozy.

Sarkozy faces a tough re-election battle in less than 100 days and reportedly told allies last month: "If we lose the triple-A, I'm dead."

France's budget minister and government spokeswoman Valerie Pecresse refused to confirm the imminent downgrade, insisting: "France is a safe investment."

But opposition Socialist lawmaker Jean-Marie Le Guen branded the loss of the triple-A "a triple failure for Sarkozy", amid charges from the left that the president's tax cuts had left France more exposed than its neighbours.

Belgium, already two ranks below the top rating at double-A, will also remain steady. The official was not able to comment on whether the eurozone's other triple-A powers, Finland and Austria, were safe.

The Financial Times reported on its website that France and Austria would both by downgraded by one notch to AA+.

The single currency fell back to $1.2638, a 16-month low, while London's FTSE 100 closed down 0.46 per cent, Frankfurt's DAX closed down 0.58 per cent and in Paris the CAC 40 dropped 0.11 per cent by the end of trading.

American stocks also fell on opening. S&P was expected to confirm the downgrade after Wall Street closes at 2100 GMT.

And there was further bad news from debt-wracked eurozone minnow Greece, when a group representing major private lenders said they had failed to reach an agreement to slash its debt burden.

Talks on a Greek write-down have "not produced a constructive consolidated response by all parties," the Institute of International Finance said.

The proposed deal would have seen banks taking a 50 per cent "haircut" on Greek debt, which would remove about 100 billion euros ($127 billion) from Athens' massive burden and avoid a full-blown default.

"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," the IIF said, in a statement issued in Washington.

"There is extreme tension," a source in Athens confirmed to AFP. "All parties involved in this crucial negotiation ought to be aware of this very grave condition and assume their responsibilities to avoid the worst."

European shares and the euro had been climbing before reports began.

"The markets are in a delicate situation at the moment and, as with all delicate situations, investors need to tread carefully," Spreadex trader Simon Furlong told AFP.

"Any further downgrades to eurozone countries, especially ones of the likes of France and Germany would be a devastating blow for European leaders ahead of the European summit at the end of the month."

European leaders are due to meet in Brussels on January 29 to nail down details of a fiscal pact designed to reassure bond markets that their deficit reduction plans are on course and their debts safe.

Earlier this week, ratings agency Fitch offered markets reassurance that it did not plan to downgrade France's top triple-A credit rating in 2012, unless the country suffered major economic shocks.

But Standard & Poor's still had the eurozone bloc under scrutiny and — while the firm did not confirm that it was to act after markets closed on Friday — the reports seemed to have ended the optimism.

France had been on notice that its triple-A debt rating was on the line, amid fears over its large public deficit and its own banks' exposure to even riskier sovereign debt in eurozone partners Greece and Italy.

Earlier Friday, Italy raised 4.75 billion euros ($6.09 billion) at mostly lower rates in a bond auction, reflecting what was then still improved market confidence and European Central Bank efforts to boost eurozone liquidity.

German Foreign Minister Guido Westerwelle said he would travel to Greece on Sunday for talks on the crisis,taking with him a message of "encouragement" and "expectation", Berlin announced.

Meanwhile, German Chancellor Angela Merkel's spokesman said she will host the leaders of Portugal, Sweden and Austria next week for informal talks on the eurozone debt crisis and fiscal integration, her spokesman said.

Optimism abounds after bond auctions

The chase by Marty Cej:

European stocks are higher, U.S. stock index futures are pointing to early gains and most industrial commodities are advancing after bond auctions in Spain and Italy garnered greater demand than expected and borrowing costs fell. The auctions not only raised billions of much-needed euros but also optimism that demand for European debt may be robust enough to help keep borrowing costs low for the countries that need the help most.

It's important to note, however, that the demand for Italian and Spanish debt is not so much a vote in the countries' plans for fiscal austerity but a no-brainer bet for the euro-zone's banks who can borrow money from the European Central Bank for next to nothing and buy short-term paper that yields almost three times as much. Still, it seems that everyone is getting the money they need, so what's the harm? The ECB and Bank of England left their benchmark interest rates unchanged this morning. The ECB's decision comes after two straight cuts and could help underpin optimism that Europe might be righting the ship.

Market sentiment was also helped by a drop in China's inflation to a 15-month low, raising expectations that monetary authorities will ease policy to spur growth. Risk on, risk off? Today, Mr. Miyagi says, "Risk on."

One commodity that is not benefiting from improving economic data out of the U.S., expectations for lower rates in China and better-than-expected European bond auctions is natural gas. The hard-luck case of the commodity world is down another 2 percent today and sitting at a two-year low. It seems as if any hillbilly out shootin' for some food can bust a hole in the ground with a shotgun blast and find a few billion cubic feet of natural gas. I must also note that it is January 12 and I walked to work in the rain. In Canada. I'm in Canada. Two weeks ago, Vero Energy sold its natural gas assets because the company could no longer bear up under the pressure of tumbling gas prices. Vero got a great price for the assets but that was two weeks ago. How many more small oil and gas companies are in the same boat? What kind of asset sales can we expect to see out of Alberta and Saskatchewan? Who are the potential buyers? Are we poised for a surge of M&A?

Also, let's talk about the drillers. Are they switching from gas to oil? Is the case for exploration companies as strong now as it was a few weeks ago?
Shaw Communications reported fiscal first-quarter earnings that fell short of analysts' average expectations. Paul Bagnell will pick the report apart for the details that matter most to investors.

Chevron warned after the close last night that fourth-quarter earnings will fall "significantly" below the third-quarter's numbers. While operating earnings will be broadly in-line with the preceding quarter, currencies played havoc with the company's bottom line. Chevron said that while it generated a foreign exchange gain of $450 million in the third quarter, it will take a loss in the fourth. The Chevron story sharpens our focus on one of the most important emerging themes this earnings season: the impact of the stronger U.S. dollar on earnings from abroad. We need to do more on this front.

In economics, we're watching retail sales and first time claims for unemployment benefits out of the U.S. and the new housing price index out of Canada.
And we're waiting to hear from Prime Minister Harper who is slated to speak from Halifax in a few moments before jetting off to Vancouver for more of the same. He is taking part in ceremonies related to the massive $33-billion shipbuilding contracts doled out in Nova Scotia and BC.