Markets suffer after Moody s warning

European markets slipped into negative territory in early trading on Tuesday after credit rating agency Moody’s cut the outlook on the European Union to negative and warned that the troubled region could lose its Aaa debt rating.

The eurozone debt crisis is really preventing stocks from making any grounds as traders expectations are still firmly placed on hopes of some sort of action from Central Banks.  With this in mind the ECB meeting on 6 September is the highlight of the trading diary in the short term and investors are keen to see exactly what Draghi has been up to rather than attending the meeting at Jackson Hole last Friday.

The timing of this warning by Moody’s, just days prior to the ECB meeting means there are increased expectations that the ECB will save the eurozone by ensuring permanently low yields in Spain and Italy. Moody’s clearly wants to maintain this pressure so that actions are taken in a timely manner.

Draghi’s comments yesterday that he did not consider buying short dated bonds to be outside the ECB’s mandate helped boost the euro and the bond market, pulling back yields. However, the equity market clearly demands more and yesterday’s rally was short lived.

By mid morning today the FTSE had lost 0.7%, the CAC was trading 0.3% lower whilst the DAX had slipped down 0.2%.

Petrofac is leading the FTSE after Credit Suisse upgraded the company from neutral to outperform whilst also increasing their target price from 1750p to 1800p. Some well received good news for the stock that has had a volatile year to date, falling sharply from all-time highs of 1785 in May. Today he share price is up 1.72% at 1542p.

On the downside, broker downgrades are pulling specific stocks lower. Vodafone was downgraded by Bernstein to neutral from outperform. RBS was also downgraded by Investec and had its target price reduced to 245p from 300p.

On the macro front UK retail sales came in 0.4% lower year on year, a slight improvement on the 0.5% expected but still the worst figure for 2012 after the London Olympics failed to boost retails sales, with households choosing to watch the games rather than going shopping.

UK August construction PMI data came in worse than expected at 49, a reading that indicates a contraction, versus 50.9 for the previous month.

This afternoon attention will be firmly on the US Manufacturing figure at 3pm.