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So this is life after AAA, eh?But first, the scoreboard:
S&P 500: -79.71
And now, the top stories:
- It all begin just after 8 PM ET on Friday, when S&P dropped its bomb on America: The AAA rating was done-zo. We were now AA+. The call was controversial. According to Treasury and other reports the agency originally made a maths error in its analysis, but in the end, there was no taking it back. The debt ceiling fight was not becoming of a country that’s rated AAA and that was that.
- Markets had anticipated something like this happening soon (so everyone says) but still once it actually came, it was still a shocker. All the analysis about what a downgrade would do was just airy speculation, as nobody knew what the real impact would be.
- Meanwhile, Europe was dealing with a similar crisis… a real debt crisis. Italy is on the brink, and existing bailout mechanisms aren’t enough. On Friday afternoon, Berlusconi and his Financial Minister Tremonti announced plans to accelerate reforms, with the idea being that then the ECB would use its Securities Markets Programme to buy Italian debt. That gave a lift in the afternoon to markets on Friday when that news came out.
- But still, even after that news, it was not clear whether the ECB would bring enough firepower to the game. On Sunday evening the ECB held a call, and word leaked that it would make “massive” secondary bond purchases of Italian and Spanish debt, although in the actual announcement, the ECB did not seem to be bringing out the bazooka. Still, the euro jumped on the news when Monday morning trading began in Asia.
- That being said, the mood was decidedly “risk off” all though not dramatically so. S&P futures swung between losses of about 2% and 2.8%. Gold surged. Initially, life post-AAA felt orderly.
- By the time the morning came to Europe and the US, it felt as though the clouds were lifting. Italy spiked over 3%! Its yields plunged, as the ECB came in with its “bazooka” and US futures were off less than 1%.
- But that proved to be brief relief. Just a couple hours into the day — by around 5:30 AM — markets were clearly coming unglued. Italy went negative. Europe’s core started getting smashed. The DAX (Germany) and the CAC-40 France got killed (oh, did you hear how everyone’s worried that France is the next AAA country to go AA+?).
- Meanwhile, S&P’s rampage continued throughout the day. After holding a conference call in the early going, the ratings agency then proceeded to carry out a range of collateral damage downgrades. Fannie and Freddie got the whack. So too did a lot of municipals. Berkshire Hathaway was put from outlook stable to negative (an amusing payback since this weekend, Warren Buffett slammed S&P).
- And then there were the financials. Bank of America got clobbered, down over 20% as its legal headaches continue to pile up. AIG is the latest to join the lawsuit parade. Citigroup was also down 14.74%. JPMorgan was off 7.58%. All these were well off their lows from earlier in the day.
- Meanwhile, at around 11:00 AM, The White House announced that Obama would give a speech at 1 PM on the downgrade, as well as the tragedy this weekend in Afghanistan. Then the speech got delayed until 1:30 (and the market sunk some more), and then Obama was 21 minutes late for that, and the market sunk some more. And then (!) Obama’s speech was a disaster, as he didn’t say anything at all, but just brought out more tired cliches about working together and the need to compromise on tax reform on the super-committee. And the market plunged some more.
- And in the end, we got today’s big time destruction. Treasuries (which were just downgraded, hilariously) surged. Gold surged 4% to new records. Oil got killed. And so on and so on. At least the Swiss Franc did well. Something remarkable: Every single stock in the S&P 500 fell. Ominously, markets ended right near their worst of the day.
- Oh, and finally, just to make you feel good: Both McGraw-Hill and Moody’s got destroyed, as the market took revenge on the ratings agencies.
- For a complete discussion of the downgrade, and its market impact, see here >