The Wall Street Journal reported on Friday evening that S&P took the unprecedented step of downgrading the US credit rating from AAA to AA+ with a negative outlook. While markets have been talking about this for some time now, the event and its timing explains the rout and turmoil in financial and commodities markets over the last two days.
The post market close rating cut on Friday evening should create a very volatile trading environment over the next week. While media coverage so far has downplayed the overall impact on the cost of US debt by comparing the two other extremes (Japan – lower rating, lower rates and Australia – higher rating, higher rates), the rating downgrade will have a significant impact on repo trades, the cost of funding proprietary positions and commodity markets over the next 4 – 12 weeks.
More significantly since S&P has now belled the cat, other rating agencies will have no other option but to follow suit, further feeding the frenzy
We will certainly see Gold reach and cross the all time high of 1,800 (possibly even higher). Oil should take another cold dip on resumption of trading on Monday but will follow Gold back to US$ 100+ a barrel fairly quickly. While economic concern will play an important role, commodities will get pushed hire as the impact of US dollar repricing as a “downgrade-able” currency hits financial markets.
You should be long commodities as volatility spike hits markets on Monday.
On the political front would this be the final straw that will break the reelection hopes of the incumbent US president and of Democrats retaining the Whitehouse in the November 2012 elections.