Eurozone Downgrade Spooks Markets But Is Not Important!
Tuesday, December 6, 2011. 9.25 a.m. Global stock markets have rallied over the last ten days to take back all of their big declines of November, as indications have grown that Europe may manage to bring some semblance of control to its debt crisis after all. Important to that hope is whether France and Germany [...]

Tuesday, December 6, 2011. 9.25 a.m.

Global stock markets have rallied over the last ten days to take back all of their big declines of November, as indications have grown that Europe may manage to bring some semblance of control to its debt crisis after all.

Important to that hope is whether France and Germany could mesh their separate concerns into an agreement that will allow the overall plan to move forward. If they can, the odds for success at the European Union summit meeting at the end of the week increase.

And if agreement is reached at that summit on the fiscal compact and budgetary discipline demanded by the European Central Bank, the ECB has hinted that it will take much more aggressive action to stop the erosion of eurozone debt.

Therefore, all eyes were on the meeting yesterday between France’s president Sarkozy and German Chancellor Merkel.

And as hoped, they emerged from that meeting to announce a “comprehensive agreement” designed to save the euro as an independent currency. The agreement includes the touchy subject of whether or not to force bond-holders to take losses to fund future bailouts, and they agreed not to do so.

The agreement and proposal also includes automatic sanctions for countries that breach the 3% of GDP deficit rules; the European Stability Mechanism to launch in 2012; and treaty changes by at least the 17 eurozone nations at the summit meeting, and preferably by all 27 EU member countries.

Just the hopes that France and Germany would finally reach agreement and remove that major stumbling block from the path of progress, had a big effect on eurozone debt markets yesterday. After spiking up to as high as 7.8% recently, the yield on Italy’s bench-mark 10-year bonds dropped below 6% for the first time since October. The yield on Spain’s benchmark bonds fell to just above 5%.

It did indicate the positive effect on the crisis that a comprehensive agreement could achieve.

Hopes for France/Germany meeting had global stock markets adding to recent gains yesterday, with European markets up close to 2%, and the U.S. Dow up more than 150 points for awhile.

But then in the afternoon came the rumor that after the close Standard & Poor’s was going to put all euro-zone countries, including Germany and France, on ‘credit watch negative’ due to their lack of progress in solving their debt crisis. In the past such a warning has resulted in a downgrade of actual credit ratings within 90 days about 50% of the time.

That decision was reportedly made two weeks ago before the progress of the last week.

That news spooked global markets. European markets gave back most of their earlier big gains, as did the U.S. market, although still closing positive for the day. And Asian markets closed down fairly sharply last night.

While the news spooked markets yesterday, the threat of an across the board downgrade of credit ratings could actually be a positive, helping to force through an agreement at the European Union summit meeting later this week on the proposals of France and Germany.

Next question technically.

Can the S&P 500 now break out above its important long-term 200-day m.a.? It’s last rally, in October, was stopped by the resistance at the m.a.

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To read my weekend newspaper column ‘It’s Time To Dump U.S. Treasuries Again!’ Click here.

Subscribers to Street Smart Report: There will be an update of our regular ‘Global Markets’ report in the subscriber area of the Street Smart Report website later today.

Yesterday in the U.S. Market.

More follow through to the big week last week, although the market closed off its earlier highs after reports that Standard & Poor’s may put all 17 eurozone countries on ‘Credit-watch negative’ due to their continuing struggles in resolving their debt crisis.

The Dow closed up 78 points, or 0.7%. The S&P 500 closed up 1.0%. The NYSE Composite closed up 1.0%. The Nasdaq closed up 1.1%. The Nasdaq 100 closed up 1.1%. The Russell 2000 closed up 1.6%. The DJ Transportation Avg. closed up 1.5%. The DJ Utilities Avg closed up 0.9%.

Gold declined $23 an ounce to $1,724, running into profit-taking after closing up $65 last week.

Oil closed flat at $100.98 a barrel.

The U.S. dollar etf UUP closed unchanged.

The U.S. Treasury bond etf TLT closed down 0.2%.

Yesterday in European Markets.

Markets in Europe also closed off earlier highs, but up some for the day. London closed up 0.3%. The German DAX closed up 0.4%. France closed up 1.2%.

Asian Markets Closed Down Last Night.

The Asia Dow closed down 1.1% last night.

Among individual markets last night:

Australia closed down 1.3%. China closed down 0.2%. Hong Kong closed down 1.2%. India closed down 0.2%. Indonesia closed down 0.7%. Japan closed down 1.4%. Malaysia closed down 0.5%. New Zealand closed down 0.3%. South Korea closed down 1.0%. Singapore closed down 0.6%. Taiwan closed down 2.0%. Thailand closed up 0.1%.

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Markets This Morning.

European markets are mixed. The London FTSE is up 0.1%. Germany’s DAX is down 1.0%. France’s CAC is down 0.4%.

Oil is down $0.28 a barrel at $100.71.

Gold is down $22 an ounce at $1,712 an ounce.

This morning in the U.S. Market:

This will be a very light week for potential market-moving economic reports, almost none, but including Factory Orders, the ISM Non-Mfg Index, and Consumer Sentiment. To see the full schedule of the week’s reports click here, and look at the left side of the page it takes you to.

Yesterday’s reports were that the ISM non-Mfg Index, which tracks the important services sector, declined some in November, to 52.0% from 52.9% in October. And Factory Orders fell 0.4% in October, about in line with the consensus forecasts. They were two of the very few disappointing U.S. economic reports of the last month or two.

They follow last week’s very positive reports, which Goldman Sachs says was the best week of positive surprises in at least five years.

Meanwhile, it still remains mostly about Europe, Europe, Europe. But 4th quarter earnings will begin coming out next week.

Our Pre-Open Indicators:

Our pre-open indicators are basically flat, pointing to the Dow being up 10 points or so in the early going, not meaningful at all as to direction by the close.

To read my weekend newspaper column ‘It’s Time To Dump U.S. Treasuries Again!’ Click here.

Subscribers to Street Smart Report: There will be an update of our regular ‘Global Markets’ report in the subscriber area of the Street Smart Report website later today.

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I’ll be back Thursday morning with the regular Thursday morning post, at 9:25 a.m. (This blog appears every Tuesday, Thursday, and Saturday morning!).

**** End of Today’s post*****

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