On US debt downgrade

Quote:
Originally Posted by SanjanaSingh
S & P has downgraded US debt -- absolutely surreal, and will have disastrous effects on managed money around the world. This is stunning.

S&P Downgrades US To AA+, Outlook Negative - Full Text | ZeroHedge

Wiseman, Venky, please comment in detail [ if you're not speechless like me, that is ]

What's the outlook for markets on Monday ?

I am quite speechless and dont really know what this means.

First reaction:

1. US treasury yields will head to 3.5 and refuse to come below that. QE3/4/5/6 whatever will no longer be able to work - they wont be able to budge the yield to less than 3.5%. Those who are holding treasuries - like China and Japan and pension funds, are going to hurt a lot because what little return they get from the treasury is going to be negated by falling bond prices

2. Sentiment which was already quite bad will be affected even more: Double dip recession is inevitable, despite the good show in jobs yesterday.

3. Money is likely to move back from treasuries into stocks, as people sell off treasuries until we get a 3.5% yield at least. People who sold stock in a panic on Thursday and moved to treasuries are going to regret their decision - it has badly boomeranged.

4. Returns on equities are however going to be more difficult because earnings will be affected by the rising rates and poor sentiment

5. Gold will continue to be safe haven. No brainer hold/buy for gold.

6. Over the next 6 months, if yields become fixed around 3.5%, pension funds will pull money out of emerging markets and seek a safe 3.5 % yield.

7. This downgrade is probably is a Republican conspiracy - S and P is probably under their control - it seeks to stymie the QE3 before it has started. Whether it succeeds depends on what happens to bond rates. Obama is doomed though - I am 60% sure he will lose the election. I would have been more certain except for one thing - Unfortunately the Republicans are like the BJP - they have no credible leadership. I mean, apart from his looks, Romney is a sleasebag and Michele Bachman is a moron. As pathetic as Advani, Swaraj, Jaitley and company. Both right wing parties need a real leader and not these idiots.

8. Oil is likely to drop. Which should act as a stimulus much better than stupid old QE3. If I was Ben, I would have raised rates and not looked to QE3 to stimulate the economy - falling commodities are the best fertilizer for economic recovery

9. Long term - I think this is a good thing. No unnatural stimulus, QE and zombie creation. The free market will actually become free and act the way it is supposed to. Long term rates should be determined by business prospects and the free market, not by fed fiats

10. US economy is likely to recover better if the fed stops its stupid QE program and lets the economy get on with it.

11. I think markets will move up on Monday as people exit bonds and slosh the liquidity around. Oil up, gold up and stocks up, bonds down - but as I said, this is really unpredictable.

Like removing a Jenga block from the bottom and waiting for the pile to fall - and trying to predict the exact shape of the pile after it finishes falling. Impossible to really predict.