U.S. financial markets being closed today due to the Martin Luther King holiday seemed to have a dampening effect on the volatility of the rest of the markets around the world. One place where there was a sizable move was in the credit default swap market where Portugal 5 Year swaps climbed 8.8%. The Portuguese swaps have reached new highs since we began tracking CDS at the end of October last year.
The jump was due to the fact that
S&P downgraded Portuguese bonds to junk status on Friday and now all three of the main rating agencies have Portugal's bonds rated below investment grade. There wasn't much of a spillover effect into the rest of Europe or even the other PIIGS countries. Here's the list of the top 10 gainers in the sovereign CDS market:
There wasn't a proportional spillover into Portuguese equities either, which dropped just 1%. I would expect that the largest market impact is felt when the first rating agency downgrades a country to junk. By the time the third rating agency gets around to doing it, as in this case, it's already yesterday's news. Portuguese equities are still holding above the 2011 lows but have been showing some weakness in 2012.
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