Standard & Poor's impending downgrade of European countries on Friday casts the mind back to the big-news downgrade of last summer, when the U.S. lost its triple-A credit rating. There are a number of trivial similarities between the two: Both occurred on Friday after markets closed and both were authored by S&P, for example.
But what is likely dominating attention right now is whether markets are going to take a similar approach this time around. The U.S. downgrade was surprising – which is the biggest difference between then and now – catching people off guard on Friday evening and giving investors plenty of time to work themselves into a frenzy by Monday morning.
When markets re-opened, the S&P 500 finished the day down nearly 80 points or 6.7 per cent, a sharp and scary decline despite assurances from a number of observers that the downgrade would have little meaningful impact.
Stocks then meandered for another two months before finally bottoming out in early October. They then rebounded about 17 per cent by the end of the month, with memories of the downgrade fading fast.
Maybe this track record is feeding into market activity on Friday. The thing about this latest downgrade – assuming it occurs as reports have suggested, with France losing its triple-A rating and Germany holding on to its rating – is that it has been well-telegraphed and potentially built into share prices already.
The reaction certainly has been fairly mild: The S&P 500 was down 0.9 per cent in afternoon trading, and that retreat incorporates disappointing quarterly results from JPMorgan Chase & Co., along with news that talks between Greece and its private bond-holders had broken down. In Europe, Germany's DAX index fell 0.6 per cent and France's CAC 40 fell just 0.1 per cent.