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Of jobs and debt The United States should be less concerned with what S&P says and more worried about getting people off food stamps, back to work, and back into homes.
Yes, a long-term debt-management plan is crucial for the Obama administration. But there's a risk that Friday's downgrade will divert attention from the far greater troubles of the United States. Some 14 million Americans who want to work can't find a job, many are on food stamps, and many have lost their homes.
As Avery Shenfeld puts it today - and I agree with the chief economist at CIBC World Markets - there's a risk in all this that the S&P action is "perceived as putting the U.S. into even more of a fiscal straightjacket than the Republican Tea Partiers are advocating, leaving less room for new stimulus should growth falter."
Mr. Shenfeld rightly worries that the downgrade will play into the hands of those in the U.S. who argue that the faster the administration can bring down the deficit, the better for the economy. Such thinking could make it harder to push through job-creation measures, just as an example.
"There are countries like Greece that couldn't launch a fiscal stimulus program even if it wanted to, because it doesn't have the money, but that's not the case in the U.S.," Mr. Shenfeld said.
President Barack Obama noted himself today that "no matter what some agency may say, we have always been and always will be a triple-A country."
The downgrade has certainly spooked markets, helping to send the Dow Jones industrial average down by more than 600 points, and the S&P/TSX composite index almost 500 points, today. But, really, Washington isn't Athens and isn't about to stop paying its bells.
"Despite losing its mint rating, the U.S. extremely unlikely to default, given its enormous wealth and potential to raise tax revenue," said Sal Guatieri of BMO Nesbitt Burns.
And when it all comes right down to it, Friday's downgrade should not have been a surprised, having been telegraphed well in advance.
Next on the agenda, and of concern, is the Joint Select Committee, a new "supercommittee," which must agree on a 10-year plan by Dec. 23 to bring in $1.5-trillion (U.S.) in deficit cuts.
"If not, which is a distinct possibility, the deficit ceiling agreement triggers $1.2-trillion of spending cuts in 2013," said Craig Alexander, the chief economist at Toronto-Dominion Bank.
"This would be a very negative outcome ... The triggered government spending cuts would likely stall the U.S. economy and runs the risk of creating a renewed contraction."
As The Globe and Mail's Jane Taber reports today, there's also concern among opposition members in Ottawa to the government's approach.
An ugly day Global markets plunged today as the gloom that has built up over the past several weeks deepened to the point of a rout.
Coupled with the U.S. downgrade is the ongoing debt crisis in Europe, where finance officials actually did more than just talk today and intervened in markets to buy Spanish and Italian bonds.
It's the first chance investors had to react to the S&P downgrade of the land of the free, home of the brave, and the heart of capitalism, and it wasn't pretty.
As The Globe and Mail's Omar El Akkad reports, the reaction in the markets was fierce.
Both Tokyo's benchmark Nikkei and Hong Kong's Hang Seng shed 2.2 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by up to 5 per cent, and in North America, the S&P 500 plunged along with the Dow and the TSX.
Oil fell and gold surged.
"So far equities rather than Treasuries are paying the price," said Sal Guatieri of BMO Nesbitt Burns.
- Market selloff gathers pace
- Follow David Berman's Market Blog
- Crisis of confidence grips markets
- Snapshot: What's happening now
- Explainer: What investors can expect this week
What's next? How bad will it get, and is the United States really out of favour for long?
Mr. Shenfeld, the chief economist at CIBC World Markets, believes the impact on U.S. borrowing costs will be minimal, and that "this will be old news" by Friday, with the focus back to the sputtering U.S. recovery.
"Indeed, the irony is that Treasury yields are lower today on a flight to safety bid out of equities worldwide," Mr. Shenfeld said in a research note.
"Canada saw no change in spreads vs. the U.S. when it was downgraded by Moody’s in 1995 ... The greater risk is that the downgrade is perceived as putting the U.S. into even more of a fiscal straightjacket than the Republican Tea Partiers are advocating, leaving less room for new stimulus should growth falter. We still see growth risks as the major concern for equities in the U.S. (although government debt is a critical issue in parts of the euro zone where borrowing costs have spiked higher)."
BMO's Mr. Guatieri pointed to the rally in Treasuries as evidence that they are still a safe haven.
"The deep, liquid Treasury pool will still be the one investors dive into when the financial climate gets sticky," he said. "Most money-market funds won’t be forced to sell their new non-AAA-rated Treasury holdings, and banks and insurers are unlikely to be forced to hold more capital against their Treasury holdings."
Derek Holt and Karen Cordes Woods of Scotia Capital aren't so sure.
"Are there knock-on to effects to follow?" Mr. Holt said.
"Another wave of deleveraging could well be one of them," Mr. Holt and Ms. Woods said in a research report.
"What those who are dismissing the punitive role of a downgrade are forgetting that Treasuries are at the root of many leveraged transactions in the global financial system. I'm concerned about the deleveraging consequences (i.e: the knock-on effects on leveraged transactions) that could compound challenges facing the risk trade to start the week."
- Global leaders race to contain crisis of confidence
- Why this debt crisis is different
- Banks brace for fallout from debt storm
- Gold soars as markets shrug off G7, ECB pleges
- Full coverage of the debt crisis in our Economy section
ECB pushes down bond yields The European Central Bank made good on its promise to support the debt of Italy and Spain, the two latest euro zone countries in the eye of the storm, in a bid to halt the virus in its tracks.
"Amid the carnage in global equities on Monday, European bond markets were a bright spot," said Benjamin Reitzes of BMO Nesbitt Burns.
The ECB stepped in and bought Italian and Spanish debt for the first time as part of its Securities Markets Program, providing a huge lift to bonds. The move came after Italy and Spain recommitted to balancing their budgets. Spanish 10-year yields plunged 92 basis points to 5.12 per cent, while Italian 10-year yields dove 82 basis points to 5.27 per cent. Those levels are much more sustainable for both countries. However, ECB support may not be enough to avoid a bailout if markets lose faith, as Portugal and Ireland can attest with their 10-year bonds yielding near 10 per cent despite ECB buying."
But that move carries its own risks, noted CMC Markets analyst Michael Hewson.
"This could well create problems going forward as the ECB ups its exposure to peripheral debt, thus exposing any new potentially expanded [bailout fund] to more liabilities, which in turn could then see France’s finances come under close scrutiny, as their contribution to the fund would then become much larger."
What should investors do? Stay calm and don't fool around with your long-term plan. Personal Finance writer Rob Carrick weighs in today with do's and don'ts amid the market chaos.
RBC downbeat on airlines RBC Dominion Securities is taking a dimmer view of Canada' two main airlines, cutting its price targets on shares of Air Canada and WestJet after their earnings last week.
Analyst Walter Spracklin cut his price target on Air Canada to $2 from $2.50, and on WestJet to $14 from $16. He held his rating on Air Canada at "sector perform," but trimmed his WestJet rating to "sector perform" from "outperform."
In Personal Finance today Many Canadians owe more debt than their income. Avoid falling into that trap.
Ideas for projects that can be completed more efficiently in the summer and may save you time and money along the way.
From today's Report on BusinessReport Typo/Error
- Dow Jones Industrials18,339.24+110.94(+0.61%)
- S&P/TSX Composite14,731.43+173.39(+1.19%)
- S&P 500 INDEX2,171.37+11.44(+0.53%)
- Crude Oil Front Month Futures$47.35+0.30(+0.64%)
- Gold Front Month Futures$1,319.400.00(0.00%)
- WestJet Airlines Ltd$23.10+0.01(+0.04%)
- Updated September 27 7:01 PM CDT. Delayed by at least 15 minutes.