Yesterday could have been a calm day, one of those rebounds that the markets rarely see. Everything was pointed in this direction: Wall Street had absorbed the news that the Fed will maintain interest rates at 0% until 2013 (after it rose to nearly 4%) and the European Central Bank continued on a bond buying frenzy, purchasing debt from peripheral countries in order to slow down the extraordinary rally in yields on Italian and Spanish debt.
Still, it is customary that markets begin the session with jumps only to suffer sharp falls later on. "People are slow in the morning as they wait for positive news and when they do not see it, they sell," affirmed Juan Ramón Caridad, a Spanish sales representative for Swiss&Global. Yesterday was not to be an exception. The Ibex, which rose 2.49% initially, ended the day with losses of 5.49%, making us reevaluate investors? 8,000 point psychological barrier. Facing such a figure, more than one person could think: clearly, we are once again talking about a bailout for Spain, and that translated into losses in the stock market.
But no. This time, the Spanish stock market was not the only to fare poorly (despite some of the big hitters, such as Santander or BBVA losing more than 7% and 8% respectively). France was to blame for this debacle. Or better said, a rumor about France.
The alarm sounded around 2:00pm: Standard & Poor?s had found another country to rob of a AAA rating. And the markets made it clear: France was the choice. Another rumor that rose up, also supported by Prime Minister Sarkozy, was the suspension of vacations. The same rating agency said on Monday that it had not thought about carrying out such a rating cut (yesterday they reiterated this statement) or that Moody?s and Fitch would decide to lend a helping hand by reaffirming France?s AAA rating and keeping a balanced perspective on their debt. The volatility is extreme, and for some time now investors have not been acting on fundamentals but on emotions. This panic is the kind we see often. Because yesterday people heard that industrial manufacturing fell in France by 1.6% (the biggest drop in a year), and rumors like this sow the seeds of emotion.
The consequences came quickly. French banks, who own the majority of the country?s debt, fell more than 10% and drug down the rest of the European banking sector. It recorded one of its worst sessions on the year. The main French index, the Cac 40, lived through its worst drop since December of 2008 and fell back 5.45%.