General Comments
Maybe it is true what they say about Friday the 13th. After the markets had a relatively calm beginning to the year, the Eurozone crises flared up again as Standard & Poor’s downgraded the debt ratings of France and Austria from AAA to AA+.[1] In total, nine countries were downgraded, including France, Austria, Malta, Slovenia, Slovak Republic, Cyprus, Italy, Portugal, and Spain. Ratings of Belgium, Finland, Ireland, Luxembourg, and The Netherlands were unchanged, but they have been given a “negative outlook.” Germany and the Slovak Republic are the only countries to have received a “stable outlook.”[2]
Unlike the US downgrade (from triple A to double A) last summer, the most recent downgrades seemed to already be priced into the market place. Global markets were barely hit Friday, and major indices closed less than one per cent down. S&P had given warning of possible downgrades, and now stated that the December summit had “not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems.”[3] Still, European politicians still moved quickly to calm the public, promising faster Eurozone reforms. French President Nicolas Sarkozy took the time to address French citizens, stating “the crisis can be overcome provided that we have the collective will and the courage to reform our country.”
A larger problem resulting from these downgrades is whether they will harm the European Financial Stability Facility (EFSF). The EFSF borrows from investors at cheap rates, and lends money to nations that are unable to borrow in the private market. If the facility loses its rating, investors will likely impose higher lending rates, affecting a state’s ability to borrow funds. The loss of France’s triple A rating will also cause further difficulty for Sarkozy in the upcoming presidential elections, only three months away. This may also alter the balance of power between Germany and France, the two nations with the most power in Eurozone reforms.
North American Markets
The S&P reached a five month highs Tuesday, Wednesday and Thursday, coming very close to reaching 1,300 for the first time since July. While down on Friday, the S&P ended the week having gained 0.9% (a 2.5% gain for the year so far).
The Federal Reserve revealed the Beige Book on Wednesday, which confirmed a growing US economy. The beige book offers a snapshot of the economy based on reports from the district banks and interviews with key businesses, economists and market experts. This, together with unemployment reports suggests the US is entering 2012 with positive momentum.
Lululemon, the pride of Canadians everywhere, is making significant gains (up 31% in 2012 alone). Lululemon is considered a consumer discretionary stock, to be doing exceptionally well in the current economy. Other discretionary companies, however, specifically in the luxury goods sector are not doing as well. Tiffany & Co., for instance, reported a slowdown in sales and cut profit forecasts.
Global Markets
While US and European equities were affected by news of the downgrade, Asian equities were not and the MSCI Asia Pacific index closed 0.9% higher on Friday.
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