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Market Round Up: November 7 - 11, 2011

Market Round Up: November 7 - 11, 2011

General Comments:  While S&P’s downgrade of the French Credit rating was issued in error and later corrected, French bond yields remain elevated.[1] Indeed, with Italy and Greece inducting new leadership, analysts are beginning to look more closely at France. Some commentators are even going so far as to ask whether France is the new Italy. Over last week, the spread (difference) between yields of similar German and French bonds increased. This suggests investors are no longer equating the risk levels of the two countries. That yields did not decrease after S&P redacted the erroneous statement may suggest that investors are taking this mistake as a true indication of the future direction of France’s credit rating. France now has the highest government bond yields among its triple-A rated European peers. France is also the second largest country in the Eurozone (after Germany) and the second largest contributor to the European Financial Stability Act. [2]

Greece’s new government includes members from the Socialists, the New Democracy Party and the Laos Party. While this coalition is incredibly important to European stability, it may be difficult to push through any reforms as parties seemed to be concerned with the upcoming elections. Papademos has deliberately steered clear of partisan politics in his past career, and may need “develop some new skills if he is to succeed in the bare-knuckle arena of Greek politics.”[3]

Saturday night Italian Members of Parliament voted in favour of the austerity package, making way for Berlusconi to resign as Prime Minister. The package includes a rise in VAT from 20% to 21%, an increase in the retirement age and wide spread job cuts. [4] An emergency government should be agreed on by Sunday or Monday. Many believe that Mario Monti, previous European Commissioner, will lead the newly formed government. Yet, many commentators do not believe this is the “end” of Berlusconi, who has been democratically elected to government three times and holds a personal fortune in excess of $6 billion. Berlusconi said this week that “while he was "relieved" to be stepping down as prime minister, he would remain as a "father figure" to his People of Freedom party.”[5]

Domestic Markets:  On Monday, the Dow closed up 0.7%, while the S&P closed up 0.6% and the TSX finished up 0.4%. Given the volatility in the market on Monday (investors reacting to mixed news from Greece and Italy), these gains seem reasonable. On Tuesday, stocks soared with news that Berlusconi would resign. Bond markets did not, however, react similarly and Italian 10-year bond yields increased above 7%. This is considered a signal for future financial problems, as many believe that yields above 7% are not sustainable in the long term. This led to a market pull back Wednesday, with the Dow closing down 3.2%, the S&P closing down 3.7% and the TSX down 2.7%. Upbeat economic news led to a rebound Thursday morning. Unfortunately, the rebound was not sustainable throughout the day, and the Dow closed up only 1%, the S&P up only 0.9% and the TSX actually down 0.4%. North American markets rallied Friday, the Dow closing up 2.2%, the S&P up 2% and the TSX up 1.4%.  These moves came after Italy’s senate agreed to a new budget, which also led to Italian 10-year bond yields falling below 7%.