Today’s Market Slump Has NOT Been About US Downgrades

As of this writing the Phisix is down by over 1% and has followed Asia and ASEAN region and global equity markets in deep red.

Chart from technistock

Concerns have been raised that falling global equity markets have been about the risks of US downgrades.

I don’t think so.

One, the passage of the US debt bill temporarily eased US default risks as measured by CDS. That risk has not gone away but will accrue overtime (years).

Two, US credit rating agencies Fitch and Moody’s has affirmed the US credit standings, but has warned of future downgrades if deficits will not be reduced.

Three, the US yield curve has not exhibited signs of US downgrade risks but of fear of recession

Fear of downgrade implies HIGHER interest rates. US interest rates have been tumbling across the curve.

Fourth, if there is an example of the effects of downgrade risks then we should look at Europe

Chart from Bespoke invest.

This is an example of how a downgrade would look like. CDS of France and Italy have spiked.

This means that while everyone’s attention is in the US, they may be missing out that today’s market’s volatility could be a dynamic emanating from Europe

Europe's tanking equity markets (STOX50e, CAC, DAX) appears to have led the US (SPX) and not the other way around.

Lastly, while one day doesn't a trend make, these are seemingly strong signs where when faced with fear from another recession-crisis, the decoupling dynamic vanishes.

S&P Cuts U.S. Ratings To Negative: A Prelude To The Return Of The Bond Vigilantes?

I occasionally come across some myopic commentators who ask “where are the bond vigilantes?”

Bond vigilante are investors, who according to Wikipedia.org, "protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields". The term “Bond Vigilante” was coined in 1984 by economist Ed Yardeni.

The implication is—the absence of bond vigilantes seem to justify reckless government ‘spending’ policies, which for mainstream ideologues, imposes little adverse side effects on the economy or on the markets.

Yet this view hardly incorporates the impact of the massive interventionism applied by the world governments on the international bond markets, as well as the impact of financial globalization.

For them, because interest rates remain low, then governments are justified to keep running a spending binge.

Anyway the same camp, characterized by their reverence to government interventions on the market to thwart ‘deflation’ had earlier been insisting about “where is inflation?”

Well, the downgrade on the outlook of US debt by the credit rating agency S & P 500 seem to presage the return of the bond vigilantes.

The Bloomberg reports, (bold emphasis mine)

Standard & Poor’s put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.

“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” New York-based S&P said in a report today. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

At the end of the day, what is unsustainable won’t last.

Chinese Credit Agency Downgrades Western Nations

A leading Chinese credit rating agency has downgraded the credit ratings of major Western economies.

Telegraph’s Ambrose Evans Pritchard writes

``Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a revolutionary picture of creditworthiness around the world, giving much greater weight to "wealth creating capacity" and foreign reserves than Fitch, Standard & Poor's, or Moody's.

``The US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.

``Meanwhile, China rises to AA+ with Germany, the Netherlands and Canada, reflecting its €2.4 trillion (£2 trillion) reserves and a blistering growth rate of 8pc to 10pc a year.

Reason for the downgrade? (bold highlights mine)

``Chinese president Hu Jintao said in April that the world needs "an objective, fair, and reasonable standard" for rating sovereign debt. Dagong appears to have stepped into the role, saying its objective was to assess countries using methods that would "not be affected by ideology".

"The reason for the global financial crisis and debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor's repayment ability," said Guan Jianzhong, Dagong's chairman.

``The agency, known in China for rating companies, said its goal is to "correct the defects" of the existing system and offer a counter-weight to Western agencies.

``Dagong appears to base growth potential on past performance but this can be misleading, especially in states enjoying technology catch-up. Japan was a high-flyer in 1970s and 1980s before stalling when the Nikkei bubble burst. It has been trapped in near perma-slump ever since.”

Some thoughts

China is possibly signaling to the West of a seismic change in the way things are being done or a structural transformation in the economic and political sphere.

Perhaps this will begin with a reduction in US treasury purchases, as China would possibly use her surpluses to fund more (ex-US) overseas acquisition or hedge them on real assets.

China may also use this to finance her integration with Asia and or as leverage to deepen her relationship with key emerging markets.

All these should put pressure to the du jour US dollar standard system.

This action seems representative of China's flaunting of her newfound economic might which should also filter into geopolitics.

If the US dollar should lose her international currency status, then this also should translate to an erosion of the US geopolitical hegemony.

Maybe this is just one of the the indications to what some has called as the Asian Century.