Now is hold, buy or sell huh? Market over-reaction or more to come?
(1) US sovereign debt credit rating downgrade by S&P ---> cost of debt increase?
Long-term negative impact on stocks if it hampers the so-called repo markets. In the repo market, large financial institutions take out overnight loans from one another to meet their short-term funding needs, customarily putting up U.S. Treasuries as collateral. If those Treasuries are seen as riskier investments going forward, banks will likely have to put up more of them to get the same-size loan, increasing their borrowing costs and reducing profits.
Check out the REPO rates, seem stable so far.
(2) Collapse of Treasuries prices ---> worsen borrowing cost?
Many stock and bond funds as well as big institutional investors such as insurance companies have guidelines requiring them to hold a certain percentage of assets graded by ratings agencies as triple-A. Because Treasuries are now graded at less than triple-A by one ratings agency, it's possible that these guidelines might force these funds to sell Treasuries to meet their quality requirements. A big sell-off could lower the price of Treasuries, reducing the value of Treasury holdings by other firms and triggering a severe market reaction.
Still, as long as the other two major ratings agencies, Moody's and Fitch, don't follow suit with a debt downgrade, forced selling of Treasuries shouldn't happen at such a large scale to have a catastrophic effect on global markets.
www.foxbusiness.com/personal-finance/201...slide-what-it-means/
(3) Negative impact on China exports
For every 1% contraction of US GDP, China exports fall by 7%, according to Deutsche Bank.
USD will depreciate faster against RMB when demand for USD and US Treasuries fall. China manufacturers loogie ---> China corporate profits will be hit ---> -ve impact on stock market.
(4) Inflation
Funds flowing out of stock market may drive up commodity prices.
Also, crude oil and iron ore and other USD-denominated commodities will become more expensive if the USD continue to fall.
Margin squeeze, corporate profits hit ---> -ve impact on stock market.
(5) China will sell US Treasuries before value of its foreign reserves decline too much
China is US' largest creditor. 70% of its foreign reserves are in USD, including US$1.5 trillion in US treasuries and another US$700 million of other assets.
Now it wants to diversify foreign reserves, so USD going to depreciate even more !
OR, China government can bargain with US to let it pump FDI into US companies or real estate...!!!
Haha, China can lift RMB capital controls so that Chinese can invest in other currencies. Heheehehehhehe, then investor can have more opportunity to ride RMB appreciation.
english.cntv.cn/program/china24/20110809/119276.shtml
english.cntv.cn/program/bizasia/20110803/102397.shtml