Developing: In Wake Of S&P Downgrade, Watching The Markets

Aug 8, 2011

The markets are trying to digest a lot, this morning: First, is the news from Friday that Standard & Poor's downgraded the United States' credit rating. Second, is that this morning the European Central Bank started buying Italian and Spanish government bonds.

The reason that's important is because lending costs to the two countries were quickly becoming unsustainable and that had led to worries that the two were headed the way of Portugal, Greece and Ireland. The ECB's actions essentially make sure Italy and Spain stay afloat, or as an analyst told Bloomberg this morning, make sure they now have an "official buyer" that replaces an "eroding buyer base" in the market.

But a small sigh of relief on the European sovereign debt front hasn't been enough to keep the markets from tumbling on fears of the broader and longer-term health of the global market. The Financial Times reports:

The FTSE All-World index is down 0.9 per cent after Asia slumped 2.5 per cent. The FTSE Eurofirst 300, which at one point turned positive on a rally from banks as sentiment in eurozone "peripheral" debt markets improve, has relapsed and is down 1.6 per cent.

Electronically traded S&P 500 futures have been volatile but now show Wall Street opening with a drop of about 2 per cent, which would take the benchmark's losses over the past 11 sessions to 13 per cent and leave it at a fresh nine-month trough.

Another thing to watch today is the bond market. Though, as the AP reports, U.S. Treasuries seem to remain stable:

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."

We will watch for developments as the day goes on and we'll certainly update once the U.S. markets open. As we wrote on Friday, there's no way to know how the markets will react. What seems certain is that today will be a day of volatility.

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