Downgrade: At Least the News is Out
https://trendmacro.com/system/files/reports/20110808TrendMacroLuskinER.pdf
Monday, August 8, 2011
The timing couldn't be worse, but it could be the capper on two weeks of panic.
US Bonds
US High Yield Bonds
The US Treasury downgrade is, in the short term, good for Treasuries and bad for corporates as certain funds rebalance in favor of Treasuries to restore their target average ratings. This will be a long-awaited opportunity to get back into high yield debt at more attractive yields.
Europe Bonds
The ECB has officially committed to buying Italian and Spanish bonds, pending ratification of the new more powerful EFSF, the promise of which was strengthened by Merkel's and Sarkozy's joint statement. This should be sufficient to staunch the vicious cycle in Italy, the one peripheral country arguably too big to save.
Gold
Federal Reserve
The ECB's bond buying makes "Plan B-plus for gold" official. We could revert to "Plan A" if the Fed undertakes QE3, taking gold to $20 00. The Fed will drop hints at Tuesday's FOMC, but it won't act now -- nor until unemployment rises and/or inflation falls.
US Macro
US Stocks
With the S&P downgrade, it's another lost quarter for US growth, but we don't expect a formal recession. For stocks, it means the news is out. We've been too optimistic so far, but we still see this as nothing more than a bad correction.