Financial Stocks Hold On to Gains Despite S&P EU Warning

Investors have shown remarkable optimism about the revival of troubled European economies, with a lot of hope bolstered by the frantic and ongoing efforts put in by the French, German and other heads of state. All eyes are on Merkel and Sarkozy to come up with a plan to quickly clean up the mess in the Eurozone, and more importantly to ensure that the other member nations stick to the plan. Morgan Stanley’s (NYSE:MS) and financials were up strong yesterday gaining 7% followed by the shares of Citigroup (NYSE:C) and RBS (NYSE:RBS) which expanded by more than 5% apiece. As markets across the globe cheered the developments in Europe with significant rallies to the various reference indexes, S&P warned that it may cut the credit ratings of 15 nations in the region, which led to a dip in broader markets toward the end of the day. ^[1]

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Within a week of downgrading 15 banks – including 6 global banking giants – and putting France on a negative-outlook watch list, S&P issued this new announcement threatening to downgrade the members of the Euro-zone. The rating agency states 5 reasons for this move with the increasing risk premiums as well as the level of debt being the primary reasons specified.

But it looks like investors finally believe that a recovery is much more likely than a collapse in the region, as evidenced by the fact that the Asian and European markets remain unfazed by this announcement. No doubt the French government going on record to acknowledge the warning while adding that they do not need to tighten their purse-strings, has also done a lot of good to quickly address investor concerns about the impact of a possible credit rating downgrade.

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1. Standard & Poor’s Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications, S&P Website, Dec 5 2011 [↩]