European markets were briefly shaken Tuesday morning by reports that France may be facing an imminent ratings downgrade on its debt. Though the rumors were quickly dismissed by French officials, the scuttlebutt served as a reminder to investors that Europe's problems didn't disappear while the U.S. was obsessing over fiscal cliffs and debt ceilings.
According to Peter Kenny, managing director at Knight Capital, investors need to pay heed to what's happening in France, but more for what it signals than what it means for U.S. markets directly. The French rumors today and downgrade last year serve as reminders that the EU is still in a recession, excluding Germany. Unlike in the States where a downgrade by Standard & Poor's in August of 2011 turned out to mean very little, a reduction of the French credit rating would actually impact their economy.
There are two issues for investors to assess. One is what a downgrade in France means to the U.S. economy. Kenny assures us in the attached video that it matters very little.
More importantly is what the headline suggests in terms of the newsflow. It wasn't long ago that U.S. markets would move largely as a function of what was happening in the EU. Kenny says it's time to start paying attention to the quagmire that is Europe once again.
"It will reemerge as a top-line story and it will be a largely negative story," he says of the European economy. At least for the moment, it's something to keep on your investment radar rather than a reason to buy or sell your stocks.
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