Terry Connelly is dean emeritus of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
1) The trade Monday AM will probably be “risk off” at first (which means stock market down big) until it is clear how the longer-dated Treasury market is acting — ie, does it confirm rampant fear in the market of higher US interest rates because of the downgrade at precisely the wrong time in our fragile “recovery’. It would help if the European Central Bank begins buying italian and Spanish government bonds directly by US opening. Some hope for a counterintuitive stable open because the notion of a downgrade was already in the rumor market during the day Friday.
2) There has never been a US Federal Reserve Meeting with the US long term debt rated less than AAA by any agency; will they take note? Will they directly address the risk to long-term interest rates by at least indicating they are considering adjusting the maturity of their balance sheet treasury holdings to longer-dated paper (a form of “QE III”? Will they announce any other form of modified easing like extending the period they will hold their current balance sheet to the same “extended period’ they have foretold for low short term rates? Any of these moves would tend to stabilize the markets for the moment.
3) Congress is out of town so can do no harm this week, but we will possibly get the first announced appointment to the “Super Congress’ now charged with dealing with the deficit in a way that will appease S&P– three from each party in the House and Senate, appointed by the respective party leaders. Soon to be known as the “Dirty Dozen”. It will need at least one Profile in Courage to elicit a 7-5 vote for something like a $4 trillion deal. The market will pay attention to these appointments to scope the odds on a real deal.
4) The markets will recognize in due course that the Italian problem in paying its debts (third largest borrowing country in the world, behind only US and Japan) is worse than any risk with the US.