Keep Your Eye On The Ball

When S&P initially announced they were reviewing the credit rating of the US Government, the stock market swooned but treasuries climbed. Treasuries are the obligations of the US government and those are the instruments directly effected by a downgrade. Yet, as the threats of defaults and downgrades have gained steam treasuries continued to climb. They have been one of the best performing asset classes since the downgrade threats started.

If the instruments that are being downgraded by S&P are not being effected, than why should equities be effected? The S&P downgrade is a non event. It is a  possibility that equity investors will freak out Monday morning but that would only be an opportunity as long as the EU doesn't spiral out of control.

In my opinion the events in the EU are of paramount importance and the rest is  a sideshow. If the ECB follows through and buys Italian bonds than I believe we will rally next week. If not, all bets are off.

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