Sunday, November 27, 2011

US Markets Fall on Trio of Euro Zone Downgrades

North American markets fell for a 7th consecutive day on Friday. Markets were plagued by bad news for the entire week, as Portugal, Hungary and Belgium were downgraded. After a shortened session on Friday, the S&P 500 fell 3.12 points or 0.27% to 1,158.67. The Dow lost 25.77 points or 0.23% to 11,231.78. For the week, the S&P dropped 4.7%.

Trio of Downgrades

On Friday, S&P downgraded Belgium from AA+ to AA because of concerns about funding and market pressures. In addition, Moody's downgraded non-euro zone member Hungary's rating, from Baa3 to the junk rating of Ba1. Earlier in the week, Hungary had asked IMF and the EU for assistance. Furthermore, on Thursday, Fitch downgraded Portugal from BB+ to the junk rating of BBB-.

Italy and German Auctions Disappoint

On Thursday, Italy auctioned $10 billion euros of half-year and 2-year bonds. The yield was 6.504% and 7.814% respectively, about 300 basis points above last month's auction.

On Wednesday, Germany planned to auction $6 billion of 10-year bonds. However, it was only able to auction $3.6 billion. It was considered a disaster by investors, and the yield on 10-year German debt rose to 2.08%, a rise of 7%.

Looking Ahead to Next Week

With the trio of downgrades this week, the situation in the euro zone is dire. The biggest fear since the debt crisis started in early 2010 has been contagion, and it appears that has occurred, with Italy and Spain needing imminent help from the EU and IMF. The inability of the U.S. Senate supercommittee to reach an agreement has not helped markets this week.

However, promises by Germany and France to take drastic action could provide markets with a temporary lift next week. In addition, Black Friday retail sales is believed to have been strong, which could provide a lift. With the beating the market has endured in the past two weeks, it does not take much good news to send markets temporarily higher. As the euro zone crisis continues and more quantitative easing is needed, gold is likely to increase in price.

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