In putting the sovereign debt ratings of 15 Eurozone countries on negative watch yesterday, Standard & Poor's Rating Services showed a particularly impressive sense of timing. The rating action punctured some of the enthusiasm building in the market for Friday's EU summit, where Germany and France are expected to spearhead a move towards greater fiscal integration in the union.
With nothing major on the U.S. economic calendar, there will likely be no distractions from developments in Europe today, with S&P's rating action front and center in market action. On the positive side, the threat of en masse Eurozone rating downgrades has the potential to rally the countries around the Franco-German proposal in Friday's summit meeting.
The bond markets had long suspected France of being at risk of losing its coveted triple-A. As such, the inclusion of France in the S&P's list was not much of a surprise. But the inclusion of Germany on the list, an otherwise pristine credit, feeds investors' anxieties that the unsettled crisis is seeping into the Eurozone core.
On a substantive level, the rating action threatens the credit profile of the European Financial Stability Facility (EFSF) rescue fund. Will the EFSF be able to sport a triple-A credit profile if its sponsors and guarantors have weaker ratings?
The rating action's impact is more in terms of investor psychology than actual pricing action. After all, the S&P's downgrade of the U.S. credit profile did little to dent the value of treasury instruments. Yields on the 10-year U.S. treasury bond has lately been in the 2% vicinity, down from the roughly 2.5% level before the S&P's summer downgrade. On the positive side, the threat of en masse Eurozone rating downgrades has the potential to rally the countries around the Franco-German proposal in Friday's summit meeting.
In corporate news, we have a solid earnings and revenue beat from Toll Brothers ( TOL ), the luxury homebuilder. In wireless spectrum sale and purchase action, Leap Wireless ( LEAP ) purchased spectrum from Verizon Wireless ( VZ ) around Chicago and sold the national carrier spectrum around other markets.
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