17.45 That concludes InvestmentEurope's second consecutive trading day of blogging on the repercussions of the US' sovereign downgrade and growing fears over Italy and Spain's respective debt burdens. Stay with us online in future for more news and insight as developments unfold.
17.45 That concludes InvestmentEurope’s second consecutive trading day of blogging on the repercussions of the US’ sovereign downgrade and growing fears over Italy and Spain’s respective debt burdens. Stay with us online in future for more news and insight as developments unfold.
17.40 Standard & Poor’s has cut the credit rating on debt issued by state-owned lenders Fannie Mae and Freddie Mac among others, citing America’s sovereign downgrade from AAA to AA+ as its reason.
The mortgage finance companies’ drops mirror those of the sovereign earlier, into whose hands they were placed in September 2008.
Other paper or entities suffering the same fate as their government’s Treasuries were 10 of 12 Federal Home Loan Banks, whose debt is implicitly government guaranteed.
Two more – banks of Chicago and Seattle – already carry AA+ ratings, so were unaffected.
Debt from the Farm Credit System, guarantor of agricultural loans, the FDIC, guaranteeing bank deposits, and National Credit Union Association, were also cut.
17.15 Greece’s regulator the Hellenic Capital Market Commission has suspended all short selling of Greek stocks until 7 October, to take effect from tomorrow, the English version of the Greek Herald newspaper also known as Kathimerini reports.
The move follows a drop in the Athens stock exchange of 6%, falling below what is seen as a psychological milestone of 1000 points.
It is not the first time the Greek regulator has taken such action, having also banned shorting for eight months in October 2008 and for four months from April 2010 following a 22% share plunge that year.
16.49 The FTSE 100 has closed down 3.4%, making it the first time in the index’s 27 years that it has fallen by more than 100 points per trading session over four days’ trading in a row.
16:48 Nick Gartside head international fixed income and co-fund manager of the JP Morgan strategic bond fund at JP Morgan Asset Management, says he believes interest rates in the UK will stay low for a long period of time, possibly not moving this year or next.
16:35 Neill Nuttall, CIO at JP Morgan Asset Management says that lack of leadership has brought the crisis to a head, with loss of confidence in political leadership acting as a catalyst. He believes S&P was right to downgrade. As a result investors need to adopt a flexible investment strategy, switching asset classes as required.
16.25 Neill Nuttall, JP Morgan Asset Management chief investment officer, head of global multi-asset group and co-fund manager of the JP Morgan Cautious Total Return fund, says that this is not a new crisis but part of an ongoing crisis that came to a head in 2008. These present significant challenges for portfolio management, in light of factors such as QE not having had much impact, and a global rebalancing that will not happen in the timeframe required. There are only three ways to resolve a debt crisis: growth, inflation or default.
“We face structural headwinds in the market driven by dominant global macro … likely to continue for three to five years, which is deleveraging the developed economy.”
16.07 Despite the challenging environment, investors taking a long or medium term view will benefit from holding a diversified portfolio of blue-chip equities, says Tristan Hanson, head of asset allocation at Jersey-based asset manager Ashburton.
High-yield non-financial corporates may also outperform, he says. But medium term gains from global government bonds will be “paltry”, and investment grade corporates only moderately better, he warns.
Emerging market equities are meanwhile the preserve of “brave” investors, he adds.
15.43 JP Morgan Asset Management’s international chief investment officer for fixed income Nick Gartside and global strategist David Shairp say in a paper a knock-on effect of sovereign downgrades is unlikely, despite the US losing its AAA rating. Economies feared to be affected include the UK, France, Germany, Canada, and Australia.
Greater discrimination in bond markets is likely however, with investors becoming more selective, say the managers.
There is rising demand for emerging market debt, they say, “where bond markets are supported by much more favourable financial metrics than in most developed countries”.
Credit ratings also reflect the better outlook on emerging markets, they add, with many of those markets receiving upgrades, while developed markets are downgraded or put under review.
15.36 The Italian and Spanish equity markets have also fallen, despite the improved performance of both sovereigns’ bond yields.
The FTSE Italia All-Share has sunk 2.5% while Spain’s Ibex 35 lost 1.6%.
15.32 European and US equity markets continue to get hit. As at 15.15 GMT, the German Dax was down 3%, the French Cac 40 slid 2.4%, the FTSE by 1.9%, and the EuroStoxx 50 also by 1.9%.
At 10.26 ET (15.26 GMT), the Dow dropped by 2.09%, the Nasdaq by 3.7% and the S&P 500 neared a 3.4% fall.
15.19 Italian and Spanish bond buying measures by the ECB seem to be working, as yields on 10 year notes for the assets have fallen lower since opening this morning.
As at 10.15am ET, or 15.15 GMT, the yield on Italian bonds had dropped off 13.4% to a value of less than 5.27%, while the yield on Spanish bonds eased by 14.8% to a value of 5.14%.
15.10 S&P will downgrade corporates following its downgrade to the US sovereign rating on Friday, Reuters is reporting.
“Announcements should be expected this morning about effects to corporations from S&P’s downgrade of the US credit rating,” says S&P’s head of sovereign ratings David Beers. Blogger and trader “Tyler Durden”, who operates under a pseudonym, warns US financials are likely to get hit.
14.50 The poor opening by US equity markets seems to be weighing on European ones. By 14.35, The Dax was off 158.54 points, or 2.54%; the Cac 40 was 61.39 points, or 1.87% lower; and Britain’s FTSE 100 was 91.41 points or 1.74% lower.
14.45 The soaring Swiss franc is leading UK fund managers to move to underweight positions in holdings there, which could find exporting goods and services difficult.
The franc rose this morning after Standard & Poor’s in effect reduced the attractiveness of the US dollar by downgrading America.
Managers including Cazenove’s Chris Rice, Henderson’s Richard Pease and Jupiter’s Cédric de Fonclare had over 20% of portfolios in Swiss stocks late in June.
But companies such as Novartis, Swatch and Nestlé will face headwinds selling overseas, economists say.
Martin Skanberg, co-manager of the Schroder European fund, says he has a “tactical underweight in Swiss equities”.
But Stephen Docherty, head of global equities at Aberdeen says Switzerland’s multi-nationals have costs in some regions “which can be matched up”.
14.33 The Dow Jones Industrial Average opens down 1.9%, or 215 points, to trade at 11,217.86. The S&P 500 index trades lower by a similar margin, while the Nasdaq Composite Index is down 2.51% in early trading, all according to Bloomberg data.
14.30 Reuters reports market sectors most sensitive to America’s economy, such as banking and natural resources are set to open sharply lower on Wall Street, using pre-market trading data. United States Steel Corp is off 5.8%, while Citigroup Inc is down 4.8%.
14.20 Royal Bank of Scotland has estimated up to €850bn – almost double the size of the European Financial Stability Facility rescue fund – may ultimately be used to buy Spanish and Italian sovereign debt, according to reports from Bloomberg. The Luxembourg-administered EFSF, established last year to contain the crises in Greece, then Ireland and Portugal, has already committed €256bn to those three countries.
14.00 Wells Fargo Advisors’ Scott Marcouiller says US stock futures indicate “a sharply lower opening” to US markets shortly, and traders should expect Friday’s lows to be tested.
Expect also high volatility – Friday’s 171-point rally following the better-than-expected July employment report lasted under 10 minutes, and was then followed by a 400-point rally within one hour.
“The market is very oversold and pessimism is high. It is too soon to say we are out of the woods yet, and especially with the S&P debt downgrade, but the selling looked more climactic at the mid-day lows Friday than what was seen at any other point last week.”
13.54 The price of oil has slipped to its lowest level since November 2010, at $82.65 a barrel, reports London & Capital Asset Management’s Steve Collins.
13.35 S&P has downgraded Israeli bonds guaranteed by the US, “the beginning of a cascade of downgrades of debt linked to the US rating” tweets the BBC’s business editor Robert Peston.
13.33 The focus on America’s downgrade is now shifting to those agencies and entities whose own rating is somehow linked to that of the US – as BlackRock rightly predicted early this morning.
Alan Wilde, head of fixed income and currency at Baring Asset Management, warns the downgrade could trigger a downgrade of Fannie Mae and Freddie Mac, whose debt is guaranteed by Washington. “A change in the rating for these government sponsored enterprises could have a knock-on effect on collateral requirements, prompting the sale of short-term paper from these enterprises in favour of Treasury bills or bonds.
But Wilde says overall there should be “no earth-shattering market impact from S&P’s decision to downgrade the US rating” as two other agencies still give America top marks. S&P’s move in his view “should be seen more as a reaction to the brinkmanship displayed by the politicians in the negotiations over the US debt ceiling – and the risk that this behaviour will be repeated in future – than a reduction in the ability of the US administration to meet its debt obligations”.
Wilde says the Federal Reserve has confirmed it will continue to accept Treasuries as collateral, and financial institutions face no capital penalty for holding them.
“In the medium to longer term, the response of foreign public-sector money to the loss of the US AAA rating is probably the most crucial unknown factor for financial markets and the path of the global economy. The extent to which foreign central banks and sovereign wealth funds buy US Treasuries to benefit from the security of a US Government promise is unknown.”
13.25 The banking analysts at Credit Suisse are holding out the possibility authorities will delay implementation of Basel III capital requirements for banks in light of the current extreme conditions.
In a research note, Credit Suisse’s team says Europe’s banking system will need “very meaningful intervention to support it”, despite it having a better funding system than before the last crisis, and generally being better capitalised.
CS rules nothing out in terms of official intervention in markets, saying “a strong sign would be if the ECB were to come in at the 10-year, which is where stress is most apparent. Beyond that, [Europe’s] banks may still need additional liquidity support. The key is the capacity of the ECB to provide this. Similar to TARP though, we would expect to see several stages of intervention, with the remit of the authorities widened as events unfold, potentially even via direct capital injection. Whilst optically looking cheap, we expect European banks to trade based on short term news flow.”
13.20 Much talk of market turbulence being caused by jumpy juniors at asset managers, left alone at the wheel while bosses head to the beach. Could the same be said perhaps of Europe’s leading politicians?
A few notables steadfastly refuse to cancel or shorten breaks while Rome (and Madrid) have burned. Germany’s Chancellor Angela Merkel is remaining on her break in the South Tyrol, while her finance minister Wolfgang Schäuble is in the north of Germany.
If Merkel heads north she may run into UK prime minister David Cameron, holidaying in Tuscany – but in constant phone contact with Whitehall and EU counterparts, we are told.
Europe’s two prominent leaders to stay at home are Italy’s Silvio Berlusconi and Spain’s José Luis Rodríguez Zapatero – with good reason.
13.15 Russell Investments’ chief investment officer Erik Ristuben suggests the media has played its part in escalating the recent tension seen in global financial markets.
“Our view is that recent negative market volatility reflects a drop in confidence in response to a spate of negative headlines – not a global economic collapse,” he says in a note written on Sunday but issued today.
“Our analysis of the facts leads us to believe that although the economy has been weakened, a “double-dip” recession still remains unlikely,” he adds.
S&P’s decision to downgrade the US is unlikely to impact bond markets, but it has raised “technical concerns” on capital requirements for banking, insurance, derivatives and money funds, he says.
12.55 Downgrading the US was “precipitous, wrong and dangerous,” says Legg Mason Capital Management’s chief investment officer Bill Miller in a cutting statement today.
“At best, S&P showed a stunning ignorance and complete disregard for the potential consequences of its actions on a fragile global financial system.
“S&P chose to take this action after the worst week in US equity markets since 2008, a week which not only saw stocks fall sharply, but which also witnessed a dangerous escalation in the ongoing European debt crisis with spreads widening to post-Euro records in systemically-important countries such as Italy and Spain amid general political paralysis.”
“The action was wholly unnecessary and the timing could not have been worse. Compounding this, the reasoning was poor, and consequences both short and long term for the global financial system are completely unpredictable,” he adds.
12.40 EU President Herman Van Rompuy has tweeted his support for the decisions made over the weekend by other eurozone policy makers.
“I welcome the decisions taken over the weekend in Europe both at national level, in Italy and Spain to strengthen fiscal discipline and growth, and by the ECB regarding the active implementation of its Securities Markets Programme,” he says.
He also describes himself as “heartened by the determination” of individual Member State leaders to implement decisions made at the 21 July Summit, including an extension of the size of the European Financial Stability Facility (EFSF), a lengthening of Greece’s debt maturity and making the terms of paying back loans less penalising for peripheral states. Read the full text.
12.32 What comes from the US late at night and angers Beijing? A ratings downgrade on Treasuries, of which China holds $1.1trn, is one answer. Another, according to China’s official news agency Xinhua, is plagues of “American moths”. If China does not have enough to dislike about America already, Xinhua says officials in China’s north are releasing bees to curb the “American moth plague” threatening its northern provinces. So another sting for Uncle Sam, after Friday’s stinging words from Beijing lecturing America about its “addiction to debts”. Xinhua’s other main story – ‘Desperate Housewives comes to an end’ – also stops short of mentioning any desperate traders hoping the end is nigh for these horrible markets.
12.21 The view from Asia today is that while the region is correlated to the West it is less reliant on the region than it was in the past, according to manager of the Fidelity Funds South East Asia Fund Allan Liu. Regional central banks have more ammunition to hand, such as being able to relax interest rates and credit policy, if needed.
His colleague Teera Chanpongsang, manager of the Fidelity Funds Emerging Asia Fund, says prospects of a slower recovery in the West should make emerging Asian growth rates more attractive to investors while the fall in commodity and oil prices should further easy inflationary pressures, improving India’s fiscal position through a reduction in import costs.
But emerging Asian equities have a high correlation to global markets and may remain volatile in the near term, warns Chanpongsang.
12.13 Much of the year’s gains for hedge funds were lost during Friday’s market turmoil, Hedge Fund Research data shows.
Half of the strategies furnishing the firm’s investable indices with daily data lost more than 1% of their value in just 24 hours.
The $2trn industry had struggled to make 1.55% by 31 July.
According to HFR’s narrower investable benchmark – widely regarded as a precursor of total industry performance – funds are 1.9% lower this month and 4.12% down this year.
Find out which sole strategies made money during the past month and on Friday here.
12.05 PSigma Investment Management’s chief investment officer Tom Becket says European policymakers deserve a break because “at least they can agree on being useless”.
Market reaction to the US downgrade is surprising, he adds, given the decision was widely expected and news of it had spread. Read more of what he has to say here.
11.55 JP Morgan Asset Management will host a call on the recent market volatility at 4pm GMT this afternoon, it announces.
Speakers include global strategist Tom Elliott, international fixed income chief investment officer Nick Gartside and chief investment officer and global multi-asset group head Neill Nuttall. We will bring you updates as it happens.
11.46 HSBC Private Bank’s UK head of investment strategy Willem Sels expects the US downgrade to have little impact on investors’ demand for holding its debt.
“We think US Treasuries should be well supported in spite of the downgrade. As economic growth around the world is slowing, monetary policy may remain on hold for longer and future inflation expectations may gradually fall, which should support bonds.”
“Many global uncertainties remain, and investors are likely to continue to look for safe havens,” he added, saying economies with the largest bond markets after the US–Japan and Italy–face significant issues.”
The bank meanwhile says its positions in bonds, gold, and cash should help compensate for losses in riskier assets.
11.22 Shares on the Athens stock exchange have plunged by almost 5% this morning, showing attempts to reassure the European markets seem to have fallen flat for now.
The UK’s FTSE 100 dipped by almost 81 points as at 11.15 GMT, France’s Cac 40 shed 69 points and the Dax fell 159 points.
11.17 Asset managers including Pimco’s Bill Gross, Dominic Rossi at Fidelity and BlackRock agree ratings agencies gave the US “the benefit of the doubt” for long enough, but there are no alternatives to Treasuries in such a volatile market. Read more here.
11.03 Fidelity International’s global equities CIO Dominic Rossi says Friday’s S&P downgrade of the US to AA+ is an “additional piece of bad news which will have an immediate effect on confidence generally which will feed through to the economy and equities.”
“The decision is of huge significance,” he says. “It is humiliating for the government and it is an indictment of the Federal system.” Next year’s US presidential election is bound to be dominated by the economic debate, he predicts: “It’ll be the economy, stupid.”
10.50 Following this morning’s surge in the price of gold, Goldman Sachs has increased the target price for the asset class in the next year to $1830, from its earlier prediction of $1735, reports London & Capital Asset Management’s Steve Collins.
10.38 European debt crisis specialist Megan Greene, formerly of the Economist Intelligence Unit, says the ECB’s peripheral bond purchasing measures are unlikely to be enough to take the heat off the sovereign debt crisis in the long term.
“The sheer size of Spain and Italy’s public debt burdens means that the ECB would have to step in with its guns fully loaded to make any significant difference in either country’s borrowing costs,” she says.
“It is unclear whether the ECB is really willing to accept such a significant amount of peripheral euro area debt on its own balance sheet given the risks involved,” she adds.
10.19 Yields on Spanish and Italian bonds have fallen sharply, in a sign the ECB’s bond purchasing programme is working, at least for now.
Italian 10 year yields fell from 5.69% on opening to 5.36%, while Spanish 10 year notes dropped from 5.66% to 5.26%.
10.05 Bloomberg reports the ECB was already buying Italian and Spanish bonds this morning, having bought Irish and Portuguese bonds last week.
The ECB has bought paper of beleaguered eurozone nations since the middle of last year.
The move puts it at odds with Germany’s Bundesbank, which has opposed continued bailouts, and expansion of the ECB’s balance sheet. Read more here.
10.00 Royal London Asset Management’s economist Ian Kernohan says “this is a crisis which should be sounding alarm bells in Washington, Beijing and the OPEC states”, warning that it has moved beyond the European sovereign debt crisis.
Risk remains of a “second Lehman-type event”, leading to severe stress in money markets, he adds.
09.54 The European market has held up well to news the US is no longer AAA credit worthy, falling by a “mild” 66 points, says Clem Chambers, chief executive of Europe’s largest stocks and markets website ADVFN.
“Last week’s market rout seemed to be enough to take this shock into account. The market saw the downgrade coming and was ready for it,” he says. The “real ramifications” will be measured by the market as the week pans out, he adds, saying to expect plenty of reassuring action from government leaders and central banks.
09.34 The Japanese stock market, or the Nikkei, has closed down 2.18% or 202.32 points.
09.30 Day two begins of InvestmentEurope’s live blog on the panic afflicting global financial markets recently. Over the weekend, an emergency phone call took place between the G7 group of nations, echoing the crisis meeting of the G20 in 2008. See its statement here.
Urgent calls were made between political leaders in France, Germany, Italy and Spain, after markets dropped significantly on Friday 5 August. On Sunday night, the ECB agreed it will purchase Italian and Spanish bonds to help calm markets when they opened on Monday.
But many eyes have turned to the US, which suffered its first ever sovereign downgrade, dragged from AAA to AA+ by ratings agency S&P after markets closed on Friday. Read an abridged version of S&P’s press release.
Already this morning, the price of gold has shot up to over $1700 as investors flock to perceived “safe haven” assets. Stay with us for the day’s developments.