European Banks Bracing For Ratings Downgrades

Ashley Page, Senior Vice President and Wealth Consultant04/16/12: Good morning, everyone! We hope that you had a great weekend despite the fact that there was probably some last minute “tax work” going on! As we always do at the beginning of the market week, we wanted to give you a “look ahead” at a few items that we will be tracking carefully during the next few days. These are just a few opinions that we have, and as with life, nothing is certain about them.

1. First, here is a “week-at-a-glance” view of several key market drivers for the next five business days. Beginning today, the U.S. reports on March retail sales and February business inventories. Tuesday and Wednesday are a combination of domestic and international events, as March data on U.S. housing starts and industrial production are released and Spain auctions Treasury bills (followed by 10-year bond sales by that country on Thursday). On Thursday, the National Association of Realtors reports on existing home sales for March and the Philadelphia Fed provides its business-outlook survey. Friday ends the market week with the IMF and World Bank holding spring meetings. In a special “Saturday edition” that we will be watching closely due to its potential European economic impact, France holds the first round of its presidential election, with a runoff expected May 6th.

What does this mean for investors? This week will be an especially interesting “market barometer,” as it has a little bit of everything. Domestically, housing, retail and industrial data is all being measured, particularly with the release of the Philadelphia Fed data. Internationally, we get another close look at how investors view the prospects of Spain and a stalwart of the European crisis, France, begins the process of a leadership change that could have significant market implications.

2. Consumers are not as optimistic about the economy as they were earlier in the year. Part of the Thomson Reuters/University of Michigan Consumer Sentiment Index that measures consumers’ feelings about current economic conditions fell to 80.6 in preliminary April numbers, down from 86 in March. Why the downward move? Simply put, consumers are growing more concerned about their personal finances with gas prices elevated and economic growth still anemic.Financial Market Outlook

What does this mean for investors? A more confident American consumer has been a substantial part of the recent market rally. As 70% of the American economy is driven by the consumer and only 30% by the industrial and service sectors, this is a trend that we are watching very carefully. A discouraged American consumer coupled with increasing international volatility from Europe and the Far East could create a “market soup” that is not very tasty.

3. In a very interesting international development, significant amounts of Chinese capital are flowing into Japan. A fascinating article in this morning’s Wall Street Journal highlights how active Chinese companies have become in making acquisitions in Japan. Over the past several months, Chinese companies have stepped in to acquire, or make significant investments in, a number of Japanese companies. This is a trend that is likely to accelerate as Japan is increasingly reliant on China’s growing wealth to help rebuild Japanese businesses. For decades, this money flow was a “one way street,” with Japan investing in Chinese factories. Now, the capital is flowing “both ways” as Japanese companies, hurt by slow domestic sales and a strong yen, need to raise funds for restructuring. From April 2003 to March 2011, Chinese companies were second only to the United States in the amount of firms completing significant capital injections into Japanese firms.

What does this mean for investors? The “leveraging effect” created by a combination of Chinese capital and Japanese technology (and brand awareness) could create a “new level” of competition for American companies. It is yet another example of how global market forces will continually impact us here at home.

4. Also on the international front this morning, European banks are bracing for a wave of ratings downgrades in coming weeks as fears of a Spanish bailout rise. On Friday, Moody’s stated that it is delaying until early May its highly watched decision on whether to downgrade the credit ratings of 114 banks in 16 European countries. Many executives at top European banks have stated that they expect their grades to be knocked down at least one notch. Concurrently, Spanish 10-year bond yields surged past 6% for the first time since December and the first time since the ECB’s three-year liquidity operations, raising fears that the country might need a bailout. EU officials are due to travel to Washington this week looking for a larger IMF infusion, although while Japan could offer $60 billion, the U.S. has until now said that the EU can use its own resources.

What does this mean for investors? The continuing problems that have appeared “calmer” in Europe since the first of the year remain a “false positive,” as the Continent’s issues are far from over. Investors need to remain very observant of the possible volatility that could be “re-introduced” from Europe in coming weeks.

Should you have any questions or concerns about your investments, please call or email me here and I would be delighted to talk with you.

Ashley Page
Senior Vice President
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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