- Mass Downgrades: Is Europe Doing something wrong ?

It was expected and, to some degree, it was already priced in by the markets. But the mass S&P downgrades of Friday are certainly ill-timed. Just this week we had a considerable improvements in both Spanish and Italian auctions. This improvement could now be jeopardized by a negative outlook that could be the prelude to further downgrades.

S&P criticized the policy response. I would say that many European countries are already in the process of enacting important reforms and need more time to address the problem. The downgrades were expected since the S&P downgrade of the U.S.
It was completely inconsistent to have U.S. with a AA+ rating and some European countries like France and Austria with a AAA rating so, in a way, the S&P downgrade more backward looking. While in the short term this downgrade might impact the markets
I do not see this a game changer in the European reform process.

- Greece has to avoid default

Greece has to do whatever it takes to negotiate a restructuring of its debt without defaulting. It is rumored that a number of creditors might would want a default to be able to claim compensation from the CDS but this would have very negative consequences for the European markets and for Greece.

The European reform can only proceed with the conditions that all the Euro-zone countries are not forced out of the single currency. A default of Greece, even if not a major event, would impact negatively every other European market and put further pressure on the yields of Spain and Italy.

- Cash is King in equities selection

Despite the renewed market uncertainties I still see equities of cash-rich companies as a good buying opportunity that becomes very relevant in an zero interest (or negative interest) environment in bonds. I would therefore renew my recommendation toward equities in European multinationals with fortress balance sheets and exposure to emerging markets and growth areas.