httpvh://www.youtube.com/watch?v=Of9o6-VQPUU

So the United States is now a AA rate country (according to at least one ratings agency). Who’d have thought it? S&P took the decision late on Friday night to downgrade the US’s credit rating over fears that the country’s budget deficit would and will not be reduced quick enough. This caused a sell-off late Friday which has continued through the Asian session and now laps at our European shores.

While significant on a political front, and a real smear on the Obama Presidency, the actual downgrade will mean very little in the short term. Costs of debt for the government and credit for businesses and consumers will rise in the short term, depressing growth, but all in all that is what the market is so het up about. The lack of growth. There is a decent argument to be said for the US downgrade actually being worse for the European situation than it is that of the States.

This was not the only bomb dropped over the weekend however with the ECB pledging to buy Spanish and Italian debt in a bid to depress yields and reduce their borrowing costs. The Italians and the Spanish both also pledged to reduce their deficits by imposing strict budgetary plans and to reduce their borrowing activity in the long run. Whether this was a definitive and universally backed measure by the ECB will remain controversial, we expect that the Bundesbank would have not have been too happy with it. Unfortunately the last time we saw the ECB intervene and buy debt the yields of that debt doubled. Further downgrades and contagion may be yet to be felt and we could see France as the next head on the block. At the moment it is German and French bond yields that are rising whilst those of the periphery are relaxing.

What these things will do to markets are unclear at the moment; they have simply made choppy seas that much more volatile. What they may cause however is a more wholesale global round of quantitative easing causing stocks to rally and businesses to grow. What the ratings agencies will make of that is anybody’s guess but as I have said above it is growth, or the lack thereof, that is the root cause of these financial tremors.

In the world of FX the G7 currencies have reacted remarkably mildly to the issues. USD is slightly weaker while everyone else is roughly on par with where they ended up on Friday evening. We expect speculators to be “trading the tape” today; waiting for new news on either the US or European and basing judgements around them. This is not a market where you wanting to take any risks.

Luckily enough there is no structured economic data today and we will be watching for twitches from Frankfurt, Washington, Zurich and Tokyo.

Latest exchange rates at time of writing