Ah, another day, another batch of new concerns out of Europe. Any celebration over yesterday’s news about a new potential deal on the EU treaty that would reign in member nations’ budgets was interrupted by Standard & Poors, who decided to crash the party with the announcement that some 15 European Nations were under increased scrutiny with the potential of a credit downgrade. Markets reacted with little movement today as investors wait on the outcome of an all-important EU meeting later this week.
S&P Threatens Downgrades
Germany and France, long considered Europe’s stallwarts against the rising storm of the debt crisis, both had their AAA ratings placed on CreditWatch negative along with 13 other European countries, a move that in the past has meant a downgrade in the next three months. The increased scrutiny was “prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.”
S&P cited five interrelated factors, including tightening credit and continued policy squabbling about finding a long term solution, as the criteria that will be examined over the next months. The hits just kept on coming for the Euro Zone this morning when S&P also initiated a CreditWatch negative for the European Financial Stability Facility (EFSF), a special purpose vehicle created to provide funds to distressed eurozone nations. Once again, all eyes are turned to the meeting of representatives of all 27 members of the European Union Thursday. “To restore market confidence in the euro area, and to ensure the political sustainability of solidarity mechanisms, it is crucial to enhance the credibility of our budget rules (deficit and debt levels) and to ensure full compliance,” European Council President Herman Van Rompuy wrote to EU leaders in a note obtained by Reuters.
Minimal Reaction from Markets
While looming S&P downgrades could mean increased costs for borrowing for all the nations involved, most investors are waiting for more news out of the EU meeting at the end of the week before making any decisions about their portfolios. The Dow Jones, S&P, and Nasdaq all moved less than 0.5 percent, with the Dow and S&P marginally rising while the Nasdaq fell slightly. Attitudes seemed narrowly positive as the deal cut by French President Nicolas Sarkozy and Angela Merkel to stabilize the EU appeared to gain traction. US Treasury Secretary Timothy Geithner publicly declared his support for the deal today. The extent of the impact S&P’s ratings downgrades on the market, while always fodder for public controversy, remains unclear. Yields on 10-year T-notes have fallen to 2.04 percent, 54 basis points below where they were before the very public downgrade of American credit in August. “What the markets have told you, is that maybe S&P’s sovereign ratings don’t matter that much in terms of pricing,” said Bonnie Baha, head of global developed credit at DoubleLine Capital LP. Geithner appeared similarly skeptical, stating, “The rating agencies were one of the motors of the crisis in 2008. One can ask if they are not playing that role again today.”
Some Stocks Move Despite Tepid Markets
Despite the generally tentative mood ahead of the meetings later this week, several stocks were on the move today. Orbitz Worldwide, Inc. (OWW) jumped almost 15 percent when Benchmark Co. analyst Frederick Moran upped his rating on the company from “hold” to “buy.” “Buy Orbitz Worldwide for ebookers and private label driven growth acceleration and profit creation in 2012,” he writes in a research note. He continued that his increasingly positive spin was due to “stable global hotel demand, accelerating profit from the ebookers European hotel operation, contribution from private label partnerships and the ensuing inflection of cash flow EBITDA to sustainable growth.” Comstock Resources, Inc. (CRK) jumped over 13 percent after news came out late Monday that they had acquired properties in the Delaware Basin. Wireless provider MetroPCS Communications, Inc. (PCS) gained over 7 percent on a day when its CFO Braxton Carter publicly decried a new deal in the works between rival AT&T, inc. (T) and T-Mobile USA.