US markets reacted negatively to credit rating agency S & P’s announcement that they’ve got all but two of the eurozone nations cards’ marked for a possible downgrade within three months. 

This has had a knock on effect for European markets this morning, in particular the Dax, as a bit of selling tests the metal of the bulls. 

It comes as little surprise that S & P has taken to carpet bombing eurozone members as it’ll hopefully be the lick up the proverbial that European leaders have needed.  Over the past few weeks bond auctions have hardly been impressive and in the run up to Christmas there’s almost another €20 billion or so of German, Italian and Spanish bonds to flog to investors.  We have to remember as well that the coveted triple A rating effectively means that your assets are a risk free asset and all the S & P has done is to call that into question for the six eurozone nations that still have one.  Remember the sub prime days not all that long ago when triple A ratings were dished out left, right and centre?  Ratings agencies still need to build back confidence and a move like this simply attempts to build that confidence back.  In time we’ll see whether EU leaders can persuade them to rethink following the outcome of this week’s summit.

Already early on we’re seeing a bounce from the FTSE which was called at one point to be opening almost as low as 5500, but this early bounce shows that many investors are happy to brush aside the comments from S & P and continue to look ahead to Thursday and Friday where expectations are building.  At the time of writing the FTSE is trading at 5570 having now eradicated all of its losses from the open.

On the economic data front things are a little quiet with the second reading of EU GDP due for release this morning which is expected to remain unchanged at 0.2%, however there’s pressure to the downside particularly following the terribly poor raft of PMIs that have consistently been pointing towards contraction for many of the bigger EU economies.  Spain saw output collapse recently to an almost three year low.

The uniting of Merkel and Sarkozy in putting forward plans to give Brussels more control over regions deemed as careless gave traders a much needed boost in sentiment.  As a result, the euro rallied against the dollar and encouraged traders into more risky assets. However, the S & P ploughed in and inevitably the euro tanked and managed to close just 18 pips up against the dollar.  This morning is much of the same and the single currency is trading down at 1.3375.  Fundamentals are playing a big part in this, but in line with the technicals, the pair is trading in an intraday bearish channel and could signal further downside.

As in recent sessions, gold tried to break through the 1750.0 resistance level yesterday but not with much luck, and after using all of its strength it gave up and plummeted 23 bucks to close at 1722.6.  It still seems that cash is king and with any hint of trouble investors are dumping their gold positions to leave them more liquid.  Currently, the precious metal is down just over 2 dollars at 1720.9.

With news of a possible downgrade for a handful of AAA rated euro zone members, crude lost all of the gains it had seen in early trading yesterday.  This week, investors will be focussing mainly on the European meetings on Thursday and Friday, where the possibility of a collapse of the common currency is highly likely.  At time of writing, Brent trades at 109.58.