Potential chaos as markets absorb US downgrade

SO ratings agency Standard and Poor’s has downgraded US long-term sovereign debt, from AAA to AA+, with a negative outlook just for good measure. Cue potential market mayhem this morning as we are now in unchartered territory. My forecast this morning comes with a larger than usual health warning attached, as it’s likely to be a particularly volatile day.

GFT quotes two-way prices on stock indices around the clock, even when the underlying markets are closed. The FTSE 100 index is called to open down approximately three per cent or over 150 points at 5,095. The German DAX is forecast to open down 190 points at 6,046, and the French CAC 40 is quoted to go down 80 points at 3,198.

This opening call is particularly tricky because by close of GFT quoting on Friday night, US stocks had actually bounced back to close up 60 points after massive intraday gyrations with a swing of over 400 points. But that close means nothing in the light of the events from the weekend.

By the time you read this, Asia will already have given us a decent cue as to what we can expect.

After finishing down over 10 per cent last week alone, another 100-plus drop on the FTSE 100 may seem relatively low-key – and it may well be the open is much more savage than that.

I would argue there are a few reasons for markets to bounce back, and we may just see shares rally once the initial panic sell-off is over. As it stands, Moody’s and Fitch both affirmed their triple-A ratings on US debt last week.

The Federal Reserve has also said that US banks would not have to increase capital that was backed by Treasury, and that discount window-borrowing would not be impacted. Tin hats on everyone!

Martin Slaney is director of global dealing operations at GFT