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Rating agencies and their influence on stock markets

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Some interesting facts about the most authoritative rating agencies and their influence

The rating agencies often publish their forecasts about oil prices, ratings of the countries, etc. Every time when the rating agency like S&P, Moody’s or Fitch give some comments the volatility often rises. We analyzed the most authoritative agencies and their influence of the market.

I think you noticed that every time binary options analysts tell us about arating agency’s assignment of a company’s rating, the volatility increases on the stock’s or currency’s chart. At the same time, an increase in volatility increases the volume of trading in the market.

All traders want to earn as much as possible in a short time before the market panics because of the revised ratings. Binary options have become the main way to earn money for many people. For me, I would like to understand how to react to the data on ratings and how to trade to make a profit in this case.

What ratings do the agencies give?

When we speak about the ratings assigned by the rating agency, we mean the credit rating. This rating helps investors analyze the financial stability of the company or the country. It helps to understand whether the company will be able to attract borrowed funds, and under what conditions, and if the company will be able to pay its loans. Logically, the higher rating allows better conditions for the loans, and the more banks are willing to give credit because of the higher probability of repayment on time, which means that the value of the company’s stocks will grow. For example, Apple has the rating AA+, which makes it as creditworthy as the US or France, while NOKIA has the credit rating BB+, which makes it less attractive than Apple, but more attractive to investors than Portugal, whose rating is BB.

The credit rating of the company or the country is assigned by the rating agency, which specializes in the assessment of creditworthiness and quality of the securities issued by this entity.

However, it should be noted that rating agencies use a methodology that primarily evaluates the likelihood of repayment of the loan taken by the issuer. Their methodology does not account for a number of current factors that may be important in the future, such as changes in market conditions or liquidity. Another important point of rating agencies is that they do not fully show their methodology and don’t provide warranties for calculations. Therefore, their ratings have a more recommendatory nature than a guaranteed fact. Hence, we have the short-term impact of the rating on the market. Remember the binary options and charts of assets. How long can we see the high volatility on the market? The panic goes until the psychological factor works. The next day, the price is corrected based on the market factors.

Also, it’s worth remembering the credit rating is assigned for money because it’s the paid service, bought by the company or the country, to be able to offer securities to a broader range of investors. At the same time, the rating agencies monitor the status of the company, not only at the time of assigning the rating, but also during cooperation. It should also be noted that the company's rating can’t be higher than the rating of the country in which the company operates. Thus, the company could qualify for a rating of BB+, but since the country has a rating of BB, the company is also assigned this rating.

Another important feature of the ratings is their delay. Frequently, a rating is made for a certain time on the basis of previously obtained data, not just considering the present facts. In 2008, the work of rating agencies could confirm ratings. Agencies confirmed stable high ratings of such companies as AIG, Enron, and Lehman Bros., but a month later these companies went bankrupt, which subsequently triggered the crisis in the US financial markets. This evidence is why investors often don’t trust the rating agencies.

What are the rating agencies?

There are about 100 rating agencies in the world. There are both global and national rating agencies. American rating agencies Moody's Investors Service, Standard & Poor's and Fitch Ratings are absolute leaders.
Each rating agency uses its own methodology to assess the creditworthiness, graduation, and designation of ratings. However, in most cases, agencies have the same designation.

The US rating agency Standard & Poor's is located in New York. Its income amounted to 2.45 billion dollars last year. S&P assigns both national and international rankings. To identify long-term ratings, S&P uses a letter designation from "A" to the “D”, as well as the symbols (+) or (-). The agency uses letters to identify the main categories and symbols with letters to identify the intermediate categories.

Moody's Investors Service, with the annual revenue of $3.3 billion, is also located in New York. It assigns national and international rankings. Moody's also uses letters, but it does not have “D” in its arsenal. Also, instead of the symbols (+) and (-) to denote the intermediate categories, Moody's uses the numbers 1, 2, 3. These numbers indicate in what part of the category the commitment is located. Thus, BB1 suggests that the obligation is in the top of the rating category.

Fitch Ratings has two main offices in New York and London. Its annual income is $1.12 billion. Fitch also uses letters from "A" to "E"to indicate the ratings. In its graduation, AAA rating is the highest, D is default, and E isnot enough information to assign the rating. E is assigned in case the issuer did not provide the documents necessary to calculate the rating.

The objectivity of ratings and their impact

Rating agencies are essential to the stock market. By establishing the company's rating, they often determine the dynamics of the cost of the company's stocks on the market. A close correlation of assets makes other basic assets of binary options change the dynamics. For example, as a result of lower oil prices, the value of oil companies’ stocks began to fall, which resulted in a decrease in tax payments to the budget and, consequently, the growth of the budget deficit. Thus, the rating agency Fitch downgraded Saudi Arabia’s rating because of low oil prices,decline of the cost of oil producers’ stocks, and as a result, growth of the budget deficit of the country, which affected its creditworthiness.

Ratings indicate a company's attractiveness to investors and creditors. However, the work of rating agencies is constantly fraught with such factors, such as the objectivity, that often raise doubts. The rating agency is a commercial company. The goal of each company is to make profit. Agencies say that their ratings are absolutely objective. However, as practice shows, this is not always true. The strongest blow to rating agencies’reputations was received in 2008 when they awarded the maximum rating to the companies that went bankrupt in a couple of months. In 2013, the rating agency S&P was criticized when it downgraded the rating of the European Union. In August 2015, S&P decreased the rating of the European Union again and sent the pair EUR/USD to its 1.0880 minimum.

Agencies Moody's Investors Service, Standard & Poor's and Fitch Ratings own 95% of the market. That is, they are a monopoly in the market for credit ratings. This means that the market doesn’t have healthy competition, which may result in subjective assessments. Now, binary options traders use the data on changes in ratings asthe short-term factors that impact the volatility of the assets. Thus, the ratings are a good opportunity to gain profit in the short term when there is panic in the market.

Disclaimer: The article is written for informative purposes only and it is not financial advice. The author does not have any position in the currency pairs mentioned, and no plans to initiate a position. He wrote the article himself and expressed his own opinions. He has no business nor personal relationships with any mentioned government entities or stocks. Readers should not treat any opinion expressed by the author as a specific inducement to make a particular trade or follow a particular strategy, but only as an expression of his opinion.

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