Standard & Poor's on Monday downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.
KEY POINTS FROM S&P STATEMENT:
* Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
AXEL MERK, PORTFOLIO MANAGER, MERK HARD CURRENCY FUND, PALO ALTO, CALIFORNIA
The challenge is that the U.S. has relied for too long on its reserve status and not engaged in the reform that got us to be the reserve currency in the first place. It's a wake up call that we need to do something in the U.S. Unfortunately, the political dynamics are unlikely to dictate that. Gold is going to benefit for an extended period, meaning that we are not going to resolve those issues.
Of course, nobody expects that there is going to be a downgrade tomorrow. Nobody expects that there is something dramatic happening right away. But still, it sets in motion a long process. They (the rating agencies) are absolutely correct that this is something serious that the structural issues need to be addressed.
DAVID WATT, SENIOR CURRENCY STRATEGIST, RBC CAPITAL MARKETS, TORONTO
It's no longer Geithner out there indicating the risks of a U.S. default. The credit rating agencies are also doing the same, saying the debt situation in the United States should be under control. The whole issue of the deficit in the United States is the key focus and this just indicates the need for a longer-term solution in place. This should put the dollar under further pressure. Take note that the dollar is already at or near record lows Against the major currencies.
MOHAMED EL-ERIAN, CHIEF EXECUTIVE OFFICER AT PIMCO, WHICH OVERSEES $1.2 TRILLION IN ASSETS, TOLD REUTERS
This new warning, this time from S&P, highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy. This also highlights the generalized deterioration in the standing of sovereign creditworthiness in advanced economies.
PHIL FLYNN, ANALYST, PFGBEST RESEARCH, CHICAGO
This looks bearish for crude. The reason is that if the U.S. government doesn't come to a budget agreement and get their spending under control then we will be forced to raise interest rates to monetize our debt. Higher interest rates would slow the economy and demand for oil and would probably put pressure on the oil price.
Higher interest rates could also mean a higher dollar -- a stronger dollar can mean lower oil prices.
Before we jump the gun and get too excited, though, it is just an outlook. It comes at a good time. It seems that the budget talks have broken down, but hopefully this will be enough to get the politicians to come to an agreement and get our debt under control.
JOHN KILDUFF, PARTNER AT AGAIN CAPITAL LLC IN NEW YORK
The U.S. debt situation got a reality check this morning from the move by S&P. Only precious metals will be seen as attractive in the aftermath of the outlook downgrade. The overall economic outlook becomes more opaque with this; equities and energies will be very much under pressure now.
PAUL HARRIS, HEAD OF NATURAL RESOURCES RISK MANAGEMENT AT BANK OF IRELAND IN DUBLIN
The oil market has been focused on demand destruction over the past week rather than the geopolitical risks in North Africa and the Middle East and this should go some way to cementing that view.
This might cap the upside in oil prices for the moment as it's difficult to see prices pushing higher with traders refocusing on the problems in the world's largest economy.
While S&P's move isn't entirely unexpected, and might well be largely priced in for the dollar, it shifts the focus and the sentiment in the market again.
TOM PORCELLI, U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK
What the agencies want to see is real steps taken to improve the situation. in the absence of that a downgrade is not far.
What then Obama administration has done in cutting the 2012 budget recently is to show that he is willing to engage. The ratings agencies have to take that as a positive, but they want to see more.
Our call is for the 10-year yield to go to 4 percent by the end of the year on inflation and growth alone. That does not even account for issues surrounding the debt. Today may be the first day that the bond market starts to price in these budget issues.
JON NAJARIAN, FOUNDER, WEB INFORMATION SITE OPTIONMONSTER.COM, CHICAGO
Traders are surprised by it. The market doubled its losses. This was unexpected. It is deserved? Probably. It shows that that many are thinking that the Republicans and the President are not addressing the major problem, which is the spending. Obviously, you have to get your spending in line. I suspect that this is what the rest of the world is worried about.
In the options market, we will see a pretty rapid increase in volatility, in VIX, in S&P options, for definitely more than just a few minutes. It will be more like 24 hours. I suspect almost a 10 percent jump in VIX instantly and even 20 percent by today or tomorrow.
PETER BUCHANAN, COMMODITIES ANALYST, SENIOR ECONOMIST CIBC IN TORONTO
I don't think this is the end of the world in some sense because they didn't downgrade the actual ratings, but just the outlook.
To some degree this is just the ratings agencies catching up with the reality where it has been obvious that the U.S. has problems both on the deficit side and debt to GDP ratio, so S&P has decided to reflect that in their outlook.