I have a feeling that Wall Street and other World markets start panic lot as stock indexes are plummeting. This is logic -  Europe has growing problems with governmental debt, some countries are fighting unemployment…Japan suffered from tsunami several weeks ago…civil wars…even China is fighting very high inflation rates. All these factors are not making our life easier and disturb markets from belief in bright future. And now what have we got, USA is losing credit worthiness.

Wall street is losing hope. S&P 500 and Dow Jones continue plummeting

Although it was logic that USA is full of problems including their ability to cover all the liabilities it has taken, admission of these problems by a pro-American (you may disagree buy this is my opinion on S&P, Moody’s and Fitch rating agencies and how much politics is underlying their ratings) did not open to anyone eyes, it made even the most optimists to admit that we are  doomed (well, I am an optimist however I am also a realist so this event was predictable but a the question is what will happen next?)

What will happen next? Double deep recession?

S&P downgraded  U.S. (Moody’s says U.S. still AAA) and is criticized by all US “patriots”.

“Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country,” Obama said as Wall Street plunged more than 3 percent.

He said he would offer his own recommendations for fixing the debt problem and cited again the need to raise taxes on wealthier Americans and make adjustments to popular but expensive entitlement programs. (Reuters)

Many will say that Standard & Poors has chosen not the right time to downgrade USA. But I fully agree with S&P because it will never be a good time to do that. People used to see AAA near US and many other countries, although they are hospital patients for a long time already. In Obama words I see only words and I am feeling that Wall Street sees the same and that’s why our markets are going down (and what else will go down??).

It is quite difficult to predict how all these events will affect economy in the nearest and far future but what we can do is to analyze what already happened and to predict market movements (at least I am better in this than useless talks which I leave to Obama). While I am writing this post European stocks have already tumbled 5 percent (Tuesday morning).

Look on the graphs below (click to increase).

US rating downgrade: DJIA, S&P500, USD index, 30y bond price

What we can be sure that while indexes are going down (two graphs above), USD index will grow ($USD) and US dollar will become stronger against other currencies. Why? Because investors are aiming to buy US treasury bonds, although the US grade was changed from AAA to AA. Look at the lowest graph ($USB), it represent us the US 30 year Treasury bond futures value changes which rocketed since the end of July from around 125 to 134+. Again why? Because investors are taking money out of stocks and throw them into the most liquid asset.

I don’t feel that markets showed everything what they got and I leave a strong possibility for USD index growth up to 76.0 points. Which will be supported by the growing demand for USD and not because of rating changes but due to Fed decision (22nd of July) to stop market stimulation program which means that Fed will:

• stop SOMA (System Open Market Account) payment reinvestment,
• increase Federal Fund rate.

If you check SOMA account you will see its decrease by 2.5 billion dollars weekly, which means that Fed is decreasing the liquidity in the market and taking out the money. It will positively influence usd growth.

Want to know more about economy? Better watch how Columbia University economic professor Glenn Hubbard discusses the long-term impact of S&P’s U.S. credit downgrade on American households.