No need to panic....just yet

Whilst its' timing was questionable, Standard & Poors bloodied the nose of the Obama Administration at 8.00pm Eastern time on Friday night, by stripping the USA of its' coveted AAA rating. Citing the political wrangling before the increase to the debt ceiling Tuesday last, and the lack of credible debt reduction measures.

To continue the boxing metaphors, the move is akin to a standing eight count. Both Moody's and Fitch have retained the highest grade for US government debt, and S&P were at pains to point out that short dated US debt continues to be rated at AAA.

But what effect will this have? Well, in practice, very little at this stage. Although China were quick to chastise America's "addiction to debt", they remain the largest holders of US Treasury Bonds. Indeed, during trade in the Far East overnight, T-Bond yields moved lower (prices rose). 

S&P now only rates 15 countries at AAA, including the UK and the Isle of Man. The UK have avoided any such downgrade by taking the rather uncomfortable but necessary austerity measures since the Coalition took power in 2010. But we are not out of the woods by any means and our efforts at defecit reduction will be closely monitored.

On top of the S&P downgrade, the surge in Italian Bond yields caused fresh concern over the weekend, sufficient for the G7 nations to put forward a statement effectively saying that they stand ready to support the global economy. Heady stuff. The ECB will begin a programme of buying Italian and Spanish Bonds today in an attempt to reduce the yield on both from 6% to a more liveable 5%.

Equities markets reaction has been fairly muted although they are still reeling from the large slides in the last five trading days. Some commentators have been quick to declare that the bad news is "in the price", although this is not a view that I share. The loss of the AAA rating for the US will certainly deal a psychological blow, and a "double dip" recession is becoming more likely by the day. Meanwhile, we may well be seeing the twilight days of the Euro in its' present form.

The safe haven that is Gold marches onwards towards $2000 an ounce, bursting through the $1700 barrier in Asian trade. A useful insurance in any investment strategy, it is proving' its worth as such once again.

So whilst I would certainly counsel anyone not to panic, the global economic picture is changing rapidly. Central Bankers and Governments will undoubtedly face some tough decisions over the coming weeks, and the price of getting it wrong could well be severe.