Standard & Poor's put a "negative" outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.

"We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013," New York-based S&P said in a report today. "If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."

Under President Barack Obama's fiscal year 2012 budget, released in February, the total debt subject to the ceiling would be $20.8 trillion in 2016. The plan House Republicans approved April 15, written by Budget Committee ChairmanPaul Ryan, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.

David Fuller's view The main surprise is that it took Standard & Poors so long to do this, and it is just a belated warning as there has been no downgrade of the actual rating which remains AAA. This seems generous to a fault. Meanwhile, here is a reminder of what $20.8 trillion, mentioned above, actually looks like: $20,800,000,000,000.

For contrast, China's foreign reserves are over 3 trillion, which is a lot of buying power as the Financial Times' Lex Column points out:

Imagine that, instead of recycling US Treasuries, China really put its enormous foreign currency reserves to work. What does $3,045bn buy you these days?

Italy. Principal and interest on the entire sovereign debt stock of il bel paese, going out to 2062, comes to $3,031bn. Or if China were after commodities, rather than countries, it could stash away 25bn barrels of Brent crude. Based on February's consumption, that would satisfy almost 13 years of net oil imports. And how about companies? Assuming a civil 30 per cent takeover premium, Beijing could buy up America's ten biggest listed firms, from ExxonMobil to JPMorgan, or the 15 biggest Euro-stocks, from BHP Billiton to Eni. For true value for money, though, China might want to browse a little closer to home. Its reserves managers could acquire the entire Nikkei 225, with $30bn in change.

In its initial, brief release today Bloomberg reported:

Standard & Poors said that more than two years after the beginning of the recent crisis, U.S. policymakers have not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.

That announcement gave the S&P 500 Index (weekly & daily) another nudge to the downside in what remains at least a partial mean reversion towards its rising 200-day MA, just as we have already seen with so many other stock markets in recent months.

Given the choppy, ranging activity for so many markets, I used today's weakness as an opportunity to commence covering my S&P short positions (see below). A further pullback on Wall Street would represent a headwind for many other stock markets.

The market most likely to be affected by the Standard & Poors Rating Service's comments on US fiscal deterioration, in my opinion, should be 30-year Treasury Bond futures (weekly & daily). However, government debt markets have the distraction of an ongoing fiscal crisis for Euroland's peripheral countries and Mr Bernanke's QE2 does not expire before the end of June. T-Bonds recovered after an initial sell-off in response to the ratings news and require a downward dynamic to reaffirm resistance near the upper side of their current trading range and a retest of the recent lows.