FTSE 100 rallies as Greece votes yes to austerity package

<p>European stock indices opened lower on Thursday with investors reacting with caution to Moody’s announcement late last night that it has put the US credit […]</p>

European stock indices opened lower on Thursday with investors reacting with caution to Moody’s announcement late last night that it has put the US credit rating on watch for a downgrade.

Investors on alert
Investors are on alert today with a multitude of factors to weigh up when gauging their risk appetite. We have the seeming deadlock on Capital Hill towards raising the US debt ceiling, along with the reactions of ratings agencies to any progress or regress made in talks. The European sovereign debt situation continues to make investors somewhat sensitive. The market is also eagerly watching for any intervention moves by Japan to sell yen to prevent the currency from strengthening too much against the US dollar, after the dollar/yen cross pair hit a new four-month low of 78.45 earlier today, whilst Ben Bernanke leaving the door ajar for QE3 is also on investors’ watch lists. To cap it all, we also have JP Morgan announcing earnings today, which could have an impact on UK banks as well.

A close eye will be kept too on the success of Italy’s bond auction too, as another spot check on investor confidence in the country’s ability to meet debt obligations.

Divisions on Capital Hill put US rating on review
It is the Moody’s warning to the US that is grabbing all the headlines today and raising investor tensions. Moody’s said that it saw a possibility that the US may not raise the debt ceiling before the August 2 deadline to help meet debt payments. As such, the ratings agency placed the US credit rating on review, opening the door for the US to lose its top notch triple-A credit rating.

There has been a sincere escalation in tensions towards the potential for the debt ceiling to not be raised. A few weeks ago the mere thought that the US would not raise the ceiling seemed very unlikely. Today it has become a real possibility, a fact emphasised by the political divisions that exist in the US towards the deficit reduction. The concern of course is that with a Presidential election looming, the Republicans could hold Obama to ransom over the debt ceiling. The apparent discontent that was rumoured to force the President to actually walk out of talks with the Republicans yesterday, heightens those concerns. Further talks are scheduled today and investors will continue to watch the situation, which is likely to keep both the US dollar and stock market somewhat sensitive.

‘Risk on’ vs ‘Risk off’
From a sector perspective, we have seen weakness in the heavyweight miners and banks, with investors continuing to recycle funds back and forth from ‘risk on’ to ‘risk off’ almost on a daily basis. Today is a risk off day, with funds moving from equities into the gold, which has subsequently reached a new record high of $1590.50 per troy ounce.

Back in UK trade, Associated British Foods was the top gainer in London after the firm reported that it was on track to meet full-year guidance. AB Foods said that pressures on profit margins, which had hit the firm’s shares during the first three months of the year, was being offset by sales at its discount fashion chain Primark. Broker Panmure Gordon has upgraded their view on the stock to a ‘buy’ from a ‘hold’ in reaction to today’s update.

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