Fidelity chief investment officer for equities Dominic Rossi says the downgrade of France by Standard & Poor’s is part of a “general re-pricing of sovereign debt”.
He says the re-pricing had started with the weakest countries like Greece and now moved on to “primary bond holders”
Rossi says: “While the downgrades to France may not be too surprising to markets, it is still disappointing news that will drag down the euro and equity markets.
“The eurozone crisis is now dominating market activity again, after a period in which better economic news from the US, and easier monetary policy in China had helped markets move higher.”
Rossi says he expects the re-pricing to spread further, despite further policy action.
He adds: “Speculation around an EFSF [European Financial Stability Facility] downgrade will now grow, complicating its ability to raise capital and displace the ECB [European Central Bank] in the sovereign bond purchasing programme.
“Both the ECB and the IMF [International Monetary Fund] will get sucked further into central roles.” (article continues below)
Rossi says the profit outlook for European countries has deteriorated while there has been a “disappointing start to the corporate reporting season”.
He says: “Corporate earnings were the one bright spot last year and this supportive driver is now fading.
“If European equities are to escape another downward spiral, we will need help from elsewhere.
“The picture in the US is more promising and Chinese equities are rebounding thanks to looser monetary policy, now that inflation has peaked there. One thing is for sure, the pressure on the euro will continue.”