S&P; 500 futures plunged a quick 10 points on news Italy Rating Lowered by S&P;, Outlook ‘Negative’

Italy’s credit rating was cut by Standard & Poor’s on concern that weakening economic growth and a “fragile” government mean the nation won’t be able to reduce the euro-region’s second-largest debt burden.

The rating was lowered to A from A+, with a negative outlook, S&P; said in a statement. The company said Italy’s net general government debt is the highest among A-rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

S&P; also said it lowered its outlook for Italy’s annual average growth to 0.7 percent for 2011 to 2014, from a prior projection of 1.3 percent. “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” it said.

“Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P; said.

Italy’s downgrade may aggravate a volatile political situation — Berlusconi faces four trials — after a decade with virtually no economic growth that has undermined debt reduction. Its government debt was 119 percent of gross domestic product last year, more than any euro country after Greece.

S&P; 500 Futures, 5-Minute Chart

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Euro Futures, 10-Minute Chart

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The market could easily be 2% higher or 2% lower 15 minutes from now. That’s how silly this crapshoot now is.

Intermediate-term there is absolutely no reason to be in this market unless you are hedged or mostly riding gold.

Barring dramatic bailout news (and perhaps even if there is some dramatic bailout news), expect Italian debt will likely be clobbered on this news. Longer-term it is Spain, Italy, and France that matters most, but short-term all eyes have been on bankrupt Greece, awaiting a proper burial.

Mike “Mish” Shedlock
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