U.S. stocks are set to open lower (Dow ~-200) on Friday’s downgrade of U.S. debt and worries about Spain and Italy. Most of the world saw orderly declines last night, but a rally at the open in Europe prompted by the ECB’s debt purchases was met with significant selling pressure. A few quick takeaways:
- There are certainly political elements to S&P’s downgrade. Their parent company, McGraw-Hill, has been targeted by a group of dissident shareholders, and there is pressure to split up the company. I imagine their decision to downgrade is an attempt to deflect some of that attention.
- If Treasury prices rise today – a likely outcome considering the selling in equities – that would show demand for U.S. debt even in the face of a downgrade.
- At this point, problems in Europe seem more problematic. We will be following market action there throughout the day and will communicate our thoughts.
- U.S. equities at this level are quite attractive, but that is not likely to prevent more selling. As usual, cooler heads will prevail.
- As we mentioned in our August 5 commentary, hard commodities are at risk here, especially the energy complex. With the prospect of longer-term lower rates more likely, gold should not be adversely effected.
See Ben Warwick's August 5 analysis on the markets and the economy, and what he's telling clients now.