European Markets Edge Up Despite Ratings Downgrade (17Jan)

Stocks edged up in Europe on Monday, showing a muted reaction to Standard & Poor’s downgrade late Friday of nine European countries, including France and Italy. Market activity was subdued, with Wall Street closed in observance of Martin Luther King’s Birthday. 

- STI: -1.3% to 2756.5

- MSCI Asia-Pac ex-Japan: -1.05%

- Euro Stoxx 50: +1.01%

- S&P500: closed for holiday

Following the downgrades, Asian stocks sold yesterday... but as for Europe... nothing! France refinanced at an even better rate. And yields ex-Germany did not rise, they fell! European stocks rallied. If markets want to go higher, they will go higher. Chances are Asia will rally today as well. Possible drag today could be China data, which is expected to slow further.

From market reactions, chances are to the upside over the short term, but its a low conviction call for us, as Greek haircut talks have broken down, US data has been below market expectations, and the prospect of China loosening is postponed. On the other hand, market supportive reasons like the rate of mfg contractions in Europe and Asia having eased somewhat, and unlimited liquidity by the ECB resulting in backdoor QE are still there. Electronics sector in Singapore could also be bottoming out if global sentiment improves, but headwinds are significant (see next para).

Over the larger trend for the STI and S&P500, we are still bearish: (a) we expect US growth to surprise on the downside due to incomes not rising fast enough to offset a fiscally tighter 2012, (b) EZ fiscal and debt-GDP targets will be missed, refinancing will be tough, exacerbated by on-going recession, (c) China will avoid hard landing but its slowdown will be a drag on Asian exports. Positive challenges to our view would be (1) the Eurozone process for fiscal integration actually addresses its suboptimal growth path, and (2) lead econ indicators globally corroborate resilience. We have some improvement in the latter already.

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