Markets trimmed the day’s initial gains to end modestly higher after ratings agency Standard & Poor’s said it will put euro-using nations under “creditwatch negative”. Benchmarks had been trading higher since the opening bells, before news of a possible downgrade of euro-zone members, including Germany and France robbed them of some of their sheen in the afternoon.
The Dow Jones Industrial Average (DJIA) edged up 0.7% to settle at 12,097.83. The Standard & Poor 500 (S&P 500) inched up by a percent to close the day at 1,257.08. The Nasdaq Composite Index managed gains of 1.1% and was up to 2,655.76. The fear-gauge CBOE Volatility Index (VIX) gained modestly to settle at 27.84. On the New York Stock Exchange more than 4 billion shares changed hands. Advancing stocks clearly outshined the decliners on the NYSE, as 76% stocks rose as opposed to 22% that declined, while the remaining 2% were unchanged.
Markets gained after the opening bell as German Chancellor Angela Merkel and French President Nicolas Sarkozy urged to change the European Union treat, seeking for stronger fiscal disciplinary measures.
After a meeting in Paris, German Chancellor Angela Merkel and French President Nicolas Sarkozy called for changes to the European Union treaty that would allow for stronger fiscal discipline, integration and budget alignment across the eurozone. They hoped the changes would be ready for approval by March. Sarkozy said: “Our wish is to go on a forced march toward re-establishing confidence in the eurozone…We don’t have time. We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders”. In their meeting at Paris, the leaders said they believe private investors should not be asked to bear the debt-burdens of the nations. They also think nations should be punished immediately if their deficits escalate beyond 3% of gross domestic product.
Coming to the positives, the yield on the 10-year Italian bond dropped to its lowest level in a month after Italian Prime Minister Mario Monti’s government approved austerity measures over the weekend. Austerity measures paved way for budget cuts of $40 billion, thus reducing fears of a sovereign default. The 10-year bond yields dropped 73 basis points to 5.93%. Lower borrowing costs come as welcome news after yields had soared to unsustainable levels of over 7%. Incidents of increased bond yield to unsustainable levels had heightened fears in the past about debt-stricken countries like Greece, Ireland and Portugal, all of which ultimately required a bailout.
However, these gains were trimmed somewhat in the afternoon, as investors grew wary of a possible rating downgrade of euro-zone nations. Standard & Poor’s will be putting these nations, along with economies like Germany and France, on “creditwatch negative”. The rating agency said such actions “are 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”.
Standard & Poor’s plans to conclude its review on the euro-zone ratings soon after the European Union summit meeting scheduled for the end of this week. According to the ratings agency: “The upcoming European summit provides an opportunity for policy makers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence”.
European Central Bank Governing Council member from Austria Ewald Nowotny criticized Standard & Poor’s saying that such a move “highlights the problem that rating agencies increasingly are assuming a political role”. A credit rating downgrade of the US in August, by the same agency, had sent the markets tumbling down.
Financials ended the day on a positive note with the Financial Select Sector SPDR (XLF) fund gaining 2.0%. As for the individual stocks in the financial sector, Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS) and American International Group, Inc. (NYSE:AIG) gained 2.7%, 5.9%, 3.7%, 2.6%, 6.8% and 1.7%, respectively.
Coming to economic reports, the Institute for Supply management reported an expansion of the non-manufacturing sector in November and for the 24th consecutive month. However the Non-Manufacturing ISM index was at its lowest since January last year. According to The Institute for Supply Management Non-Manufacturing Business Survey Committee: “The NMI registered 52 percent in November, 0.9 percentage point lower than the 52.9 percent registered in October, and indicating continued growth at a slightly slower rate in the non-manufacturing sector”. Additionally, the New Orders Index increased by 0.6% to 53%.
