In November 1998 Moody's downgraded Japan's sovereign rating to Aa1 from Aaa. While Japanese government 10-year bond yields rose sharply following the downgrade, counter-intuitively, the Nikkei and the yen rallied.
Similar to the Japanese sovereign downgrade in 1998, Barclays Capital believes that U.S. macro fundamentals will drive U.S. asset prices rather than a ratings revision. If Congress falls short of $4 trillion and S&P sticks to its words, Barclays expects that after a brief muted market reaction, the direction of the markets will be highly leveraged to the expectations of a rebound in economic activity in the second half of 2011.
To read the article from Barclays Capital click here.