Bouncing Back?

Update (6:38 am PDT): DOW up +141.60 in early trading.
Update (6:25 am PDT): Market futures poised to open strongly higher.
Update (2:10 am PDT): DOW futures swing wildly again, from +220.00 to - 91.00. Gold bouncing back to over $1,760.00.

So as morning dawn breaks, all eyes are on the markets to see if the carnage of the past few days (yesterday in particular) will continue.

The catalyst for all this volatility has been the S&P downgrade of US long term debt.

And for that reason the real market to watch yesterday was the bond market. Would money panic and leave US Treasury debt?

The answer yesterday was a resounding NO! 

Investors were not only willing to buy and hold US Treasury debt but they are willing to buy and hold that debt at even lower rates of interest than going into the downgrade.

In fact investors were running out of nearly everything out there except for gold and Treasuries.

So those out there cheering the downgrade as the springboard to a US dollar collapse will be severely disappointed because the market is clearly not ready for that at this point.

If you have the time, Martin Armstrong has written an interesting analysis of the S&P downgrade.

Armstrong notes that news of the downgrade was obviously running around the halls of Wall Street in advance. S&P notified the US Treasury on Friday afternoon that it was planning to lower the credit rating, according to government officials, and the company sent a draft of its analysis to the White House. The White House sprang into action trying to convince S&P that its figures were faulty. Any hint of this news was confined to the rumor mill as it did not appear on TV. White House officials argued they discovered a $2 trillion hole in their calculations and briefed journalists. Nonetheless, they failed to win a delay from S&P that proceeded with the downgrade.

The 500 point drop in the DOW on Thursday was clearly caused by selling by those who had inside knowledge of what was coming.

But that's simply an aside from the main issue.

Armstong makes an interesting analysis of the downgrade with suggestions that the act may have handcuffed the Tea Party Republicans from forcing an extension of the Bush tax cuts by President Obama in a second budget battle at the end of the year.  The drama that played out can now be leveraged to allow these tax cuts to expire.

Is the downgrade a way of manipulating the politicians? It's an interesting read.

At the time this is written (12:15 am PDT), DOW futures are up +189 and the stage is set for a dramatic rebound in the markets later this morning.

We do live in interesting times.

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