Markets Tumble As Standard & Poor’s Issues Warning

Monday morning, the markets opened with good intentions. The weekend had brought positive progress from the French and German leaders. Monday’s meeting brought good news. The euro, which was predicted to fall after the Friday speeches from Merkel and Sarkozy showed huge disparity in their views for a future eurozone and they were far apart on agreements for a new EU treaty. On Monday morning, Italy’s new Prime Minister Monti, unveiled Italy’s tough austerity plans. Ireland’s leader made a public speech outlining Ireland’s plans to get their finances and debt under control. Greece continued to improve and bond yields were dropping.

The euro, spent most of the day in positive territory. All exchanges and markets in Europe moving upwards.

On Friday the only good news was the US employment drop to 8.6%, not a great number, but compared to the 9.0% that had been reported most of the year, this was good news.

Investors over the weekend, would have bet that Mondays markets would have

EUROPEAN MARKETS DOWN

US MARKET UP

USD STRONG

EUR WEAK

What we ended up with at the close on Monday of US markets

EUROPEAN MARKETS SOARED UP AND CLOSED DOWN

US MARKETS OPEN UP AND THEN DROP DOWN

USD OPENED DOWN AND THEN CLOSED UP

EUR OPENED UP AND CLOSED DOWN

 

What caused this to happen?

Investors are worn to the brink, they are no longer making smart investments, their nerves are frayed and they are reacting to each piece of news. As it drives markets up and down.

Ratings agency Standard & Poor’s warned it might downgrade euro zone countries en masse if European leaders fail to produce a credible plan to solve the region’s debt crisis at a summit later this week.

The unprecedented warning brought to a halt a rally in global equities on Monday, when the leaders of France and Germany agreed a plan aimed at guiding the region out of its two-year-old crisis. S&P said it had told 15 of the 17 euro zone countries, including Germany, France and four others with the top AAA credit rating, that it might downgrade them within 90 days, depending on the outcome of Friday’s summit.

The warning took the sheen off a Franco-German agreement, to be put to other member states on Friday, to impose budget discipline across the currency area through European Union treaty changes.

 

What effect can this have?

Many pension funds mandates of triple-A rated holdings will be forced to sell government issues, which could trigger a surge in yields as prices plummet.

Funds that will be required to divest of non-AAA investments are few and does not expect a huge impact in the market from such sell-offs.

On Monday also federal regulators approved tougher rules on Wall Street risk-taking on adopting the MF Global rule, named after the collapsed brokerage firm that is believed to have improperly used millions of dollars of customer money.

The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers.

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