Markets Not Responding As Expected To Moody's Downgrade

Markets Not Responding As Expected To Moody's Downgrade

Moody’s Corporation (NYSE:MCO) news of downgrading of US and Global banks met with rallies in stocks and bonds, much unexpected to the usual way, reports Bloomberg. As Morgan Stanley (NYSE:MS) was downgraded two levels rather than a threatened three grades and Credit- default swaps tied to Bank of America Corp (NYSE:BAC), CitiGroup Inc. (NYSE:C) and Goldman Sachs Group, Inc. (NYSE:GS) which was lowered to within two levels of junk along with, also improved.

As per the analyst markets have already absorbed the downgrade news long before as Moody’s Corporation (NYSE:MCO) have been following it since Feb. “American banks are stronger today than they were three years ago,” said Gerard Cassidy, a bank equity analyst with RBC Capital Markets. One more reason for the equity rally is that, none of the financial firms was cut more than Moody’s had forecasted.

“Moody’s is not going to detect some problem in advance and move a rating to warn the public,” said Ken Fisher, chief executive officer and founder of Woodside, California-based Fisher Investments, which has about $44 billion under management. “Whether it’s a stock or a bond, the free market already did that. Moody’s goes along afterwards and effectively validates what the market’s already done.”

What saved Morgan Stanley (NYSE:MS) from largest potential downgrade was the support from Mitsubishi UFJ Financial Group Inc and improved capital ratios.

As per the banks which were downgraded, most of them downplayed the rating, Citigroup Inc. (NYSE:C) said “arbitrary and completely unwarranted”, “Morgan Stanley said its ratings don’t reflect the actions it has taken to cut risk”. Credit Suisse said it was pleased to remain among the top-rated large banks, while Bank of America said it has strengthened its capital and risk management.

Some analyst even questioned Moody’s rating as Minneapolis-based U.S. Bancorp (NYSE:USB), the fifth-largest U.S. bank by deposits (but small when compared to other Global banks), is still rated Aa3 by Moody’s, five levels higher than Citigroup or Charlotte, North Carolina-based Bank of America Corp (NYSE:BAC).

Though the news has made stocks and bonds climb in the short run, but many experts feel in long term it may affect their operations forcing them to take stringent actions.


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