Ad Hoc Commentary – the sovereign debt crisis oscillates back to Japan

Japan was downgraded by S&P from A+ to AA-. We said many times before that the sovereign debt crisis will center around Europe, Japan, and America. Europe is the ugliest, and America is the prettiest of the three ugly sisters. It will not be like dominoes, but it will likely oscillate between them. Back in Nov 2013 we commented on the oscillations:
“…The official story is the European Central Bank (ECB) interest rate cut is to prevent euro zone’s recovery from stalling as inflation tumbles. That is good enough for most. However, yours truly believe this move signals the return of the sovereign debt crisis to Europe. In Aug 2012, we said the European debt crisis had ‘solved’ itself and is going for Japan. Today, we say the crisis returns to Europe as a banking & sovereign crisis…”

And today, we say the crisis returns to Japan. We should not give too much credit to rating agencies. Before the mortgage crisis, the rating agencies were behind the curve. Today, they all are trying to be ahead of the curve. Since being ahead of the curve involves predicting the future, it is probable that JGB might rally before they sell-off. However, ultimately, yours truly believe that the price of 10y JGBs will likely be lower in one months’ time.

Yes, Brazil was downgraded from BBB- out of investment grade into BB+ exactly one week ago. But Mr Market didn’t care much. That is because Mr Market is not dictated by rating agencies. However, in yours truly humble opinion, we should probably start paying attention now given that Japan is probably going to be spot-on.

Good luck in the markets.