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Markets retreat as France loses its AAA rating Glencore Xstrata merger progresses

Article By: ,  Senior Market Analyst
November 20, 2012 11:37 AM

European woes returned to take centre stage for investors again in early trading on Tuesday. European shares retreated this morning after France lost its AAA credit rating from Moody’s and investors nervously awaited a meeting of eurozone finance ministers to discuss Greece’s future. Markets were unable to sustain yesterday’s spectacular rally, which saw the FTSE having its biggest gain this year.

The move by Moody’s had been widely anticipated so the falls across Europe were slight, however, it was sufficient to bring a negative mood to the start of the trading day. Moody’s reduced France’s credit rating by one notch and will keep it on negative outlook. This downgrade shows that the effects of the eurozone crisis is now starting to hurt the core areas and not just peripheral Europe as before. There is a growing concern that France, Europe’s number two economy, will be next in line and this was evident in the French 10-year bond yield which rose two basis points to 2.09%, however, the yield is still far from unsustainable.

Elsewhere in Europe, Greece is still on the radar as eurozone ministers meet later and are expected to release the next tranche of emergency funds. However, Finland’s finance minister said she was unsure whether this would happen, bringing more uncertainty to the picture.

Here in the UK banks and miners slipped back after their strong rally yesterday and oil companies also dropped tracking oil prices lower.

Shareholders in Glencore today voted in favour of a $67 billion merger with Xstrata to create the world’s fourth largest diversified mining company. Xstrata’s investors are also expected to approve the deal later today. This includes Qatar’s sovereign wealth fund, Xstrata’s second largest shareholder, who last week said that they would back the deal unreservedly. The fund had previously forced Glencore to increase their offer for Xstrata to 3.05 shares of Glencore from 2.8. At last this deal is making progress after 10 months on the table and several twists later. Xstrata is trading up 1.75% and Glencore up 1%.

With no domestic economic data due today and a quiet day with regards to economic data in the US, investors will look firmly towards the eurozone meeting later this afternoon for direction and any news of further progress of the fiscal cliff dilemma in the US.

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