Free Markets, Free People


Global markets off after US credit downgrade

As expected global market reaction to the US credit downgrade has been anything but positive.

Global stock markets sank again Monday as worries over the downgrade of U.S. debt outweighed relief at a European Central Bank pledge to buy up Italian and Spanish bonds to help the two countries avoid devastating defaults.

European markets shed their early momentum and losses were heavy in Asia. Most stocks were trading sharply lower amid mounting fears over the opening of U.S. markets, when traders will have their first chance to respond to Standard & Poor’s momentous decision to lower its triple A rating for the U.S.

"The reverberations from S&P’s downgrade are still being felt across the globe," said David Jones, chief market strategist at IG Index.

The European Central Bank’s buy of Italian and Spanish bonds – two Euro countries in deep financial trouble – at first seemed to allay the expected downturn.  However that was later reversed and global markets saw a sharp downturn.

At this time one can only speculate what will happen in US markets, but the global sell off is not a good sign.

Monday’s trading came after one of the worst market weeks since the collapse of U.S. investment bank Lehman Brothers in 2008 – around $2.5 trillion was wiped off global stocks last week.

In Europe, Britain’s FTSE 100 index of leading British shares was down 1.7 percent at 5,157 while France’s CAC-40 fell 1.6 percent to 3,227. Germany’s DAX was 2.3 percent lower at 6,091.

Sentiment in Europe was hurt by an expected sell-off at the U.S. open – Dow futures were down 1.8 percent at 11,196 while the broader Standard & Poor’s 500 futures fell 2.1 percent to 1,173.

The one bright spot in an otherwise dismal picture is the US Treasuries market.  And “bright spot” is a relative term considering the rest of the markets:

So far, the S&P downgrade doesn’t seem to be having too much of an impact on U.S. government bonds, known as Treasuries. The worry has been that the downgrade would prompt investors to demand more, but the yield on ten-year Treasuries has actually fallen.

"Early market reactions suggest that the treasury market will remain well supported," said Jane Foley, an analyst at Rabobank International. "Even though there may be no sharp sell-off in treasuries this week, S&P’s decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely."

Two points.  One – yes, it should provide such a signal.  However, if that signal isn’t acted upon and acted upon swiftly, then two – the treasury market will not remain well supported.  Interest rates will rise on demand by investors and servicing our debt will cost more and more.

To add more fuel to the fire, there’s this:

"Investors are concerned about a rising risk of global recession, credit downgrades especially now in the eurozone, such as France, the threat of a major bank bust and a global liquidity trap as investors stay in cash," said Neil MacKinnon, global macro strategist at VTB Capital.

So much to watch and consider.   While this may not be the most interesting news to read about, none is more vital.  The problems in both Europe and the US have a far reaching effect on global markets.  And they will have an effect, at some point, on everyone’s wallet.  We’re in uncharted territory here, and unfortunately, there are no easy and painless ways to solve these problems.

~McQ

Twitter: @McQandO

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10 Responses to Global markets off after US credit downgrade

  • “there are no easy and painless ways to solve these problems”

    Sure there is Bruce, you know the answers – Tax the RICH!  Spend more to stimulate the economy!  Vote Democrat in 2012!

    Look ma!  I can be President!

    • I think they might back off on that because they would be admitting something is wrong.

      I expect more from the Denial and Kill the Messenger approach than saying we need to increase taxes. 

      • The new euphamism for raise taxes is now “balanced approach”

        Listen for that bit of newspeak A LOT as we go forward

        • Yeah.  I think there will be a “balanced approach.”
          When the “Bush tax cuts” expire, everybody will see their taxes go up, not just he “rich.”

        • I thought the balanced approach was to increase taxes and increase spending. 

  • The political reaction is fascinating… or nauseating, depending on your perspective.

    Jean-Francois Kerry (who, I believe, served in Vietnam) has said that this is the “tea party downgrade.”  I look for this to be the meme d’jour from the left.  I wonder how many people are stupid enough to swallow that?  Sadly, I fear that quite a few ARE that stupid.

    Tax Cheat Timmy is even better.  He says that S&P has showed “bad judgement.”  Oh, absolutely!  Why, NOBDOY would downgrade somebody’s credit rating just because they are in debt up to their eyeballs, asking to borrow even more, and have no plausible plans – or even credible determination – to start spending less much less paying off what they owe.

    Jebus.  If S&P and the other credit rating agencies have showed bad judgment, it’s in that they didn’t downgrade us before now, even years ago when it SHOULD have been obvious* that our liabilities were going to explode far beyond our ability to pay them.

    —-

    (*) O’ course, it WAS obvious to some people, but they were derided as cranks, kooks, or just a bunch of grinches who wanted to starve the elderly, women, children, the poor, and minorities.

    • Schieffer: “Is this going to be a one-term presidency?”
      Axelord: “We are in a different place than we were the day he did that interview.”
      Schieffer: “We are, things are worse than they were.”
      Gone are the days of … “I mean in a way Obama’s standing above the country, above – above the world, he’s sort of God.”

  • Tea Party Downgrade?

    How about ENTITLEMENT DOWNGRADE?
    http://si.wsj.net/public/resources/images/ED-AO035_1downg_NS_20110807180003.jpg

    Of course, the Elite Political Class and their minions (who keep the EPC in power) won’t be ABLE to participate in the suffering.

  • “The European Central Bank’s buy of Italian and Spanish bonds – two Euro countries in deep financial trouble – at first seemed to allay the expected downturn.”  This is debt monetization and I challenge anyone to show me a historical case where this turned out well.
    And yes, the US is doing it too.  QE2 was nothing but debt monetization.

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