What’s Important in the Financial World (11/21/2011)

Moody’s warned that France is at risk for a downgrade in the credit rating agency’s outlook. This does not mean a loss of its AAA rating is imminent. It does mean that another eurozone nation has been completely caught in the web of recession and sovereign debt concerns. Most experts believe that the eurozone can survive if only small and weak members like Greece risk default. Now, the third largest economy in Europe, Italy, is under scrutiny, and the second  largest, France, is up against more skepticism from international capital markets investors. France probably has until early next year, when it releases fourth-quarter GDP, before buyers of sovereign paper pass judgment.

The DJIA moved back to 12,000 recently after selling down to 11,000 in late September. It looks likely that lower range will be tested again, perhaps this week. The Dow is at 11,976. It would only take a sell-off during this week’s four trading days to push the index much lower. And the ingredients are ready. EU sovereign debt trouble has worsened because of political unrest and the harsh light shined on Spain and Italy recently. China’s rulers recently commented that the world has entered a recession that is likely to persist for some time. Most estimates for U.S. holiday sales have weakened. And early results of store activity should be available by the end of  Thursday — Thanksgiving.

The so-called supercommittee likely will announce in the next 24 hours that it has failed to reach an agreement on deficit reduction. That will begin to trigger budget cuts of well over a billion dollars. It also will nearly kill the hopes of Democrats for an extension in unemployment benefits. Hundreds of thousands of the jobless may have no income next year. That will take them out of the consumer economy and put more strain on state and local governments, as well as the friends and families of many of these people. A “no decision” by the committee will increase worry about what will happen to the economy as it moves into 2012.

A shortened trading week may make markets in the U.S. unusually volatile. Traders will have to use the first three days of the week to position themselves for bad news from Europe. Trouble on Thursday, if it comes, will not allow investors to react quickly. Friday is a short trading day. If supercommittee decisions and anxiety about the weekend’s negotiations within several EU nations on the road to austerity cause a flight from equities, the last day of the week could be one of the most volatile sessions of 2011.

Douglas A. McIntyre