S&P rating downgrades.

16th January 2012

Ian Copelin, Investment Director comments, “After a couple of weeks in which better economic news from the US and easier monetary policy in China was the markets main focus (and had helped markets move higher), the euro-zone crisis is once again dominating market activity.

After markets closed last Friday (13 January 2012), Standard & Poor’s, the rating agency, downgraded France to AA+ from AAA with a negative outlook.  It also cut Italy, Spain, Portugal and Cyprus by two grades, while also lowering the long-term ratings on Austria, Malta, Slovakia and Slovenia.  Germany, Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands had their ratings affirmed by S&P.

The downgrade had been widely expected and was already priced in to equity and bond prices.

The downgrades also didn’t limit borrowing ability – France today sold €1.895 billion of one-year notes without a problem at a yield of 0.406%, versus 0.454% at an auction of similar-maturity securities on 9 January 2012, while the yield on France’s 10-year bond dropped four basis points to 3.03%.  Spain’s 10-year yield fell four basis points to 5.19% and Italy’s 10-year bonds dropped two basis points.  Ten-year German bund yields were little changed at 1.77%.

The FTSE 100 Index closed up 20.8 points (or 0.37%) at 5,657.44.   However, Carnival, the world’s biggest cruise operator, fell £3.70 (or 16.46%) to £18.78, after announcing that the grounding of the Costa Concordia off Italy’s Tuscan Coast will cost the company as much as $95 million.  Although it’s too early to forecast the likely effect on Carnival’s bookings, Alexa Huener, a spokeswoman for TUI Travel, Europe’s largest tour operator said that so far TUI Cruises isn’t getting cancellations.

The US equity and bond markets are closed today for the Martin Luther King Jr. Day.”