S&P’s opinions were made public after the New York Stock Exchange had shut up shop for the weekend and in the first two hours of opening today the S&P 500 had fallen by 2.3% while the Dow Jones dropped 2%. At the same time, the dollar lost 1.4% a similar amount against the euro and 0.7% against sterling.
Market news
Outside the US, the FTSE 100 is down 2.3% near its own close and has been gradually falling for most of the late afternoon. The Nikkei has already closed 2.2% down with the Shanghai Composite also down, by 3.8%.
As the day progresses US news hardly gets better as there have also been reports that the US could be further downgraded at least once within the next six to 12 months.
But how significant is the downgrade and what does it mean for investors?
If nothing else, the downgrade is symbolic for what it signifies, putting a line in the sand to mark the first official notification that the US is no longer the world’s leading economy.
Invesco Perpetual’s chief economist John Greenwood said it marks a stage in the “gradual relative decline of the US” rather than being “a specific driver of market events or economic change”. Market analysts and investment professionals have know the US economy has been in trouble for several years and the financial crisis simply quickened the pace of its fall.
UK safe haven
Greenwood voices what is virtually a consensus opinion, and what has heightened the exposure and negative sentiment attached to this is that it involves the world’s largest economy.
One significant impact on investors is that US Treasuries – and we Brits would like to say that our gilts have a similar standing – have been at the heart of their risk free rate calculations. UK gilts may even become a safe haven investment as a result.
But, as Carl Astorri, global head of economics & asset strategy at Coutts, suggests, while buying government bonds tactically may have a certain appeal, “it is hard to see the value in current government yields beyond the very short term”.
So nothing new for government bonds then.
Overseas interest
The big uncertainty is the reaction of non-US sovereigns to the downgrade. Baring Asset Management’s head of fixed income and currency Alan Wilde summed it up nicely when he questioned how foreign central banks and sovereign wealth funds will react given they used to buy US Treasuries to benefit from the security of a US Government promise.
Is this ‘promise’ still worth the Treasury paper it is written on? The answer is “Yes” as the downgrade itself should not in itself have any short-term impact on US economic or market fundamentals. Now that the US has reached an agreement on how to deal with its budget deficit, its outlook is more clear – no more certain, but certainly more clear. It would not be a surprise for its own stock markets to absorb the news and continue to strengthen its corporate balance sheets.
The longer-term impact is, obviously, uncertain but not significantly more uncertain than it was before S&P’s announcement on Friday or following its first warning in April.
