(eToro Blog) U.S. markets were under pressure for most of Friday’s trading session as fears over a rumored downgrade of France and Austria’s credit rating were later confirmed. Despite that, volatility moved off its high as traders were unwilling to hold volatility ahead of Monday’s Martin Luther King holiday.
On the heels of Thursday’s worse than expected U.S. economic data, sentiment pulled prices lower as investors absorbed the reality of a downgrade by the S&P credit rating agency. Most of this information had already been priced into the market, and the market should be given credit for its resiliency; even a month ago, this kind of news would have cratered the U.S. equity markets, as volatility then was slightly over 30%.
Before the U.S. markets opened, the Italian bond auction saw Italy borrow at improved levels, much as the Spanish government experienced on Thursday. Italy sold €4.75 billion of bonds, its maximum target; €4 billion of 2014 benchmark bonds with a coupon of 6.00% were sold at an average yield of 4.83%, down from 5.62% at the previous sale in December.
During the U.S. afternoon, S&P informed France that the country’s triple-A rating will be lowered one notch to AA-plus. This level was priced into the market, and some relief was felt, as many believed that France could have been downgraded by two notches. When comparing France to the United States, which is not centrally involved in the current debt crisis, France has a weaker outlook. S&P confirms that there are a number of other European countries that could be notified of a credit downgrade but reaffirmed that Germany isn’t among them.
The U.S. deficit jumped 10.4%, the biggest gain since May, to $47.75 billion, according to the Commerce Department. The October trade gap was revised down modestly to $43.27 billion from $43.47 billion. Economists surveyed had expected the deficit to rebound to $45.2 billion. U.S. exports fell 0.9% to $177.84 billion, imports were 1.3% higher at $225.59 billion. The increase in petroleum prices and purchases of capital goods increased to $43.83 billion, which was a record. U.S. exports to Eurozone countries were off 6.9% in November, which is a function of the decline in European imports.
Separately, the University of Michigan index of consumer sentiment climbed to 74 from 69.9 at the end of December while analysts surveyed had expected an index level of 71.5. The measure has increased 9.9 points within the last two months, the biggest such gain since April-May 2009.
Technically, the U.S. markets are hanging on to an upward bias. European debt issues continued to be a drag but the U.S. markets are doing their best to decouple from the negative momentum of European bourses. The S&P 500 Index closed near short term support levels at 1285; target support below the markets is the 200-day moving average near 1258. A close above 1300 would likely lead to a test of 1350.
Looking forward, markets will likely be driven by European headlines. If U.S. markets continue to show signs of economic improvement and earnings are better than expected, market forces will likely drive up U.S. markets over the short term.
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