The Telegraph
Monday , August 8 , 2011
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Sensex suspense after US rating fall

Mumbai, Aug. 7: Analysts believe the Indian bourses are likely to begin on a weak note tomorrow in a knee-jerk reaction to Standard & Poor’s (S&P) downgrade of US credit rating on Friday but are divided in their opinion on the trend for the rest of the day.

The sensex had lost 387 points on Friday after crashing 700 points intra-day.

Some feel the mood will depend largely on how the other bourses, particularly those in Europe, react; all eyes will also be on US futures.

“There could be a sentimental impact of the US debt downgrade by S&P and the stock markets could open lower. However, what happens after that will depend on how Europe pans out, not to mention how crude oil prices move,” Dipen Shah, senior vice-president (private client group research), Kotak Securities, said.

Dharmesh Pancholi, senior manager-advisory (equity) of Sharekhan, says the downgrade will have a negative impact on investor sentiment and there can be an initial fall.

However, head of Standard & Poor’s sovereign ratings David Beers told Fox News Sunday he did not expect “that much impact” when global markets open on Monday due to what he called a “mild deterioration” in US credit standing, according to Reuters. Beers called the US treasury department’s criticism of the credit rating agency’s analysis a “complete misrepresentation”.

Late on Friday, S&P downgraded the AAA credit rating enjoyed by the US by a notch to AA+. For the US, the downgrade may lead to a higher interest rates on bonds and notes even as interest on mortgages and car loans, which are pegged to the yield on treasury securities, may inch up.

The downgrade came on a day global stock markets were rattled by concerns over a possible double-dip recession in the US and the sovereign debt crisis in Europe spreading to more countries in the continent.

The US has been enjoying AAA status since 1917. Hence, it is difficult to predict how the markets will react to the downgrade after so many years.

“We have not seen a downgrade in US debt in around 100 years. This has not happened in our living memory. It will be difficult to pinpoint the exact reaction of stocks to this development,” says Arun Kejriwal, director of KRIS. Kejriwal expects some kind of panic or fear in the markets on Monday, though the extent of this panic will be known only when trading begins.

Kejriwal also observed that the impact of the downgrade would be less severe on the Indian markets as the country would not be directly affected.

Experts said a downgrade by the S&P was always in the air and there were ample indications in April when the credit rating agency lowered the long-term credit outlook of the US. So, some feel, the downgrade has not come as a surprise to the markets, and the reaction will not be severe.

D.R. Dogra, managing director and chief executive officer of rating agency Care, told The Telegraph that there would be no major upheaval as the stock markets had already factored in a downgrade. “The critical issue for the markets is whether the US is heading towards a double-dip recession or whether the European debt crisis spreads to more countries,” he added.

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