This is not a buying opportunity

We asked our readers last week if they reckoned stocks would rally after the grim summer. Stockmarkets suffered mid-year panics during both 2009 and 2010, followed by decent rallies, and we wanted to know if 2011 might show a similar pattern. Most respondents were pessimistic about that.

Indeed, they were pessimistic even before Friday and market reactions yesterday suggest that the US downgrade has not made them any more optimistic. Stock indices throughout Asia showed a similar pattern during Monday trading, slumping in the early hours and recovering slightly later in the day. Taiwan’s Taiex and Korea’s Kospi were the biggest losers among the big Asian indices, shedding 3.8% each. Singapore’s Straits Times index lost 3.7% and both the Hang Seng and Nikkei, in Hong Kong and Tokyo, lost around 2.2%.

Most commodities also lost ground during Asian hours, with the notable exception of gold, which gained 2.7% as investors sought a safe haven from the turmoil.

Even so, the downgrade itself does little to change the broader economic outlook. “Much ado about nothing,” wrote Satyajit Das, author of Traders, Guns and Money and the soon-to-released Extreme Money, in an email. “It was widely anticipated and predictable. The US faces no immediate threat of losing access to markets and its cost of funding is unlikely to be seriously affected.”

Most market participants seemed to share that view yesterday, and an avalanche of emails from economists and portfolio managers told a similar story.

“The drop in Treasury yield last week shows that there is no significant concern about America’s ability to service and repay its debt,” said Erik Ristuben, chief investment officer for the Americas at Russell Investments, adding only that the downgrade “raised technical concerns regarding capital requirements for banking, insurance, derivatives and money funds”.

Even that effect is likely to be limited. “Regulators and other will ensure that US Treasuries are still accepted as collateral and are not penalised in capital terms. The real debt crisis is in Europe,” said Das.

That much is certainly true. But Michala Marcussen, a strategist at Societe Generale, also noted that both crises share a common origin: “The muddling through approach of policymakers on both sides of the Atlantic carries much of the blame for the current crises, and as the markets brace for the shockwaves from the S&P US downgrade, policymakers alone hold the keys to determining whether this latest development triggers a new recession or not.”

Our readers might be right to think this is not a buying opportunity.