Implications and Direct Impacts on S&P Rating Cut on United States
By LawrenceS&P officially cut the rating of United States from AAA to AA+ with negative outlook.
You can read reports on that from the following sites,
As a trader I do not really care what the hell it will do to the economy around the world in the next 6 months nor should you. Focus on the things that will affect you immediately is more important.
Implications
S&P indicated that they will announce changes to the various levels of government issued liabilities (i.e. bonds, etc.) on Monday.
When an instrument credit rating gets lowered, the valuation of such will be dropped by all well established financial institutions. Thus the first wave of news that may hit the market is target valuation of US bonds.
Direct Impacts
That can means from nothing happens (i.e. the instrument is so hot everyone wants it and ignore the valuation changes) to 5% hair cut (i.e. no bids within 5% immediately) or more.
US bond future has a limit down of 3 big points. Historically that has happened only several times. No sure if that will happen on Monday.
Indirect Impacts
US 30-days Treasuries are commonly used among hedge funds, traders, even money market funds to park their capital while trading other instruments using these t-bills as collaterals.
If these t-bills get a hair cut, margin call will be resulted if the entity is trading very close to maxing out its capital by Friday market close.
In the stock market, the side got cornered is the long side as market breadth clearly showing bottom picking of more than a week already.
Thus margin call will likely impact the long side most, resulting in potential huge drop in index futures pre Monday open.
Be Prepared
If you are long stocks on margin but your intention is for long term investment and that your decision is to hold these instruments as long as possible, then raise cash over the weekend. If huge gap down materializes, then you have a small window of time to increase the cash in the account to avoid margin call.
If you are a beginner in trading, then you can take a week break from trading because the mess caused by this event will take some time to sort out. There will be news, heated exchange, etc. between the US government and the rest of the world for sure. Each piece of news shock will send the market into more chaos until things get settled.
If you are a seasoned trader, you do not need my advice here. The usual drill of reduced size, controlled risk, and wait for your setups only will get you through this.
Follow up articles,
S&P Credit Rating Cut on United States Initial Reactions
Usual Strategies Used to Pop the Stock Market
