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Debt fears spread to French banks - Latest Market Analysis

Ben Bernanke added to the raft of news investors are rapidly having to digest, issuing a statement from the US Federal Reserve post (European) market close yesterday. US markets initially plunged as the indication of “QE3” they were looking for did not materialise. However the explicit announcement of further stimulus (in the form of keeping interest rates at exceptionally low levels for another two years) and leaving the door open for further measures gradually lured investors back into the market, which saw an impressive surge at their close. Treasury yields reduced in response to the telegraphed lower interest rate environment which typically benefits fixed income investors.

With the FTSE opening around 100 points higher, Mervyn King, the governor of the Bank of England, held a press conference early in the day, stating that inflation could push above 5% before the end of the year although should fall rapidly in 2012. He also reduced the UK’s full year GDP forecast to 1.4%, disappointing considering its revision from 1.8% in May and the fact that the data did not include the damage caused by recent market volatility.

The afternoon saw the evaporation of early gains as European markets followed their US counterparts lower as the US began its trading day. The sell off gained ground towards the end of trade, led lower by energy, mining and banking stocks. The FTSE 100 ended the day down 157 points at 5007, with Barclays, RBS, Standard Chartered and HSBC all making the dreaded 5% club.

Sparking the latest sell off were fears surrounding Society General, one of Europe’s largest banks, which was remarkably down 20% at one point, echoing losses seen by Bank of America earlier in the week. The sell off was initiated by a rumours that France may be next in line to lose its AAA credit rating, a scenario that would see its bond yields rise with subsequent write down hurting those institutions with significant exposure. Adding to fears were claims from European institutions stating that money market flows from US institutions have fallen by one third this week, as they reduce their European exposure to ensure they receive financial guarantees from the US government.

Despite refuting the rumours themselves and confirmation from Fitch that France was stable and retained its top credit rating, the damage was already done and financial institutions across Europe suffered in what many recognised as a throw-back to the fragility and fear experienced during the credit crisis.

This was posted in Bdaily's Members' News section by John Dance .