COMING WEEK MARKET MOVERS: US CREDIT DOWNGRADE VS. ACCELERATING EU CONTAGION

"The downgrade of the US’s credit rating may rattle already nervous global asset markets. The big risk is that this actually sparks some serous USD selling as winds up creating some kind of “credit event” (major institution suddenly insolvent). That’s not expected, for a variety of reasons. Primary among these is that, as we noted last week,

• There are few assets liquid enough for big players like China or other large sovereign wealth funds to park their money.
• Any major selloff obviously would devalue the remaining holdings of these large funds faster than they could sell them, so they won’t. They just won’t buy as many new ones.
• The move by S&P was not unexpected, given how little new deficit plan actually does to reduce the US’s massive deficit, the plan is a mere band-aid, not long term solution that credit agencies would have preferred. The US is still lacking the political will to make real headway on its deficit.

So while we do expect reduced USD demand over time, we don’t expect to see a major USD selloff. Moreover, if markets are even slightly afraid of the chance of the following potential market mover happening, the US credit downgrade, and virtually everything else, will be a secondary.

FURTHER DEVELOPMENTS IN EU SOVEREIGN DEBT & BANKING CRISIS: GERMANY TO GIVE UP ON THE EU?!

There is plenty of potential in the EU’s spreading contagion to continue dominating market movements.
For example, the German paper Der Spiegel reported (via zerohedge.com) that German PM Merkel’s advisors are opposed to any German participation in a bailout for Italy. Key points these advisors make:

• Italy Too Big For EFSF To Save – Spiegel
• Doubts Whether Tripling EFSF Would Help It Save Italy
• Italy Must Make Savings, Reforms To Exit Crisis – Spiegel
• Italy Debt Guarantee Could Raise Doubts About Germany’s Finances – Spiegel
• EFSF Should Only Help Small, Mid-Size Countries – Spiegel

at http://www.businessinsider.com/coming-week-market-movers-us-credit-downgrade-vs-accelerating-eu-contagion-2011-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29#ixzz1UMuc7mXc