EU stocks mixed after S&P puts credit ratings for top notch EU states on negative watch for downgrade

<p>EU stocks were largely mixed on Tuesday, with defensive stocks supported and heavyweight miners and banks seeing weakness as investors reacted to a move by […]</p>

EU stocks were largely mixed on Tuesday, with defensive stocks supported and heavyweight miners and banks seeing weakness as investors reacted to a move by credit ratings agency S&P which put all 15 of the 17 euro adopted states on negative watch for a ratings downgrade.

The move by the Standard and Poor’s is timed well to put additional pressure on European leaders to make real progress at this week’s EU Summit in Brussels but timed badly to keep investors on edge. The ratings agency put all six countries in the eurozone with a top notch Triple ‘A’ rating such as Germany and France on a negative watch for a 50% chance of a downgrade within the next 90 days, though it could come considerably sooner should the EU Summit fail to muster significant and credible solutions to contain the debt crisis.

Whilst ratings agencies continue to try and restore their credibility, which had been lost by their failure to adequately assess the quality of debt in the previous financial crisis that saw the fall of Lehman Brothers, the move could be seen as positive influence on proceedings this week. If EU politicians needed any reminder of what the fallout would look like by a failure to deliver sweeping EU Treaty change agreements and allowing the ECB to boost its bond purchases, the S&P provided it last night by putting all euro adopted states, barring Greece and Cyprus, on a negative watch.

The move in truth does not change much in the run up to the EU Summit, however it does make the likely fallout of a lack of agreement more transparent.

EU stocks opened largely mixed within the first hour of trading, with the FTSE 100 losing just five points, whilst the French CAC lost seven points and the German DAX saw the most weakness, losing 0.8% or 50 points in trading.

Much of the early falls were focused on weakness in mining and banking stocks, two sectors that have rallied strongly over the last week’s trading as the FTSE 100 and peer EU iIndices gained on investor optimism. We have seen a diversification of investor funds from the heavyweight and risky mining and banking stocks into the defensive stock sectors such as pharmaceutical and tobacco firms. This shows investors’ motivation to remove elements of risk built up over the last week as we head closer to the Brussels Summit.

Data in the form of EU GDP at 10am will take a focus from investors whilst German manufacturing orders later in the morning at 11am will also likely influence the near term stock sentiment. That said, investor minds are firmly entrenched in the European situation right now and as such, the markets are likely to continue to be headline driven.

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