COMMENTARY:

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK

"There were ripples in the markets earlier in the day about the downgrades, but there wasn't much reaction to the actual announcement because it was seen as inevitable.

"There were a few hours of uncertainty and a question as to whether Germany would be downgraded. That would have been a shock but it didn't happen. All these countries are taking a big stake in stabilizing the finances of the peripheral countries so there's a potential for them all to be looking at big short-term demand for money. The economic situation is not good in Europe and the situation of very weak countries is still not absolutely resolved so there is potential for further downgrades some time from now.

"But there are also some good developments. The ECB had success with their longer-term funding and there's hope the banking system may be stabilized, at least in terms of funding, for now. The debt auctions in Italy and Spain (that drew solid demand) were good news."

REACTION BEFORE S&P'S ANNOUNCEMENT: YANNICK NAUD, PORTFOLIO MANAGER, GLENDEVON KING ASSET MANAGEMENT, LONDON

"Exactly 100 days before the first round of Presidential elections, the downgrade will have a political impact domestically for Nicolas Sarkozy and his ambition to stay in power for another five years. The impact will be felt internationally since France is influential on euro zone matters. It will undoubtedly weaken proposed solutions to the euro zone crisis and lead to the end of Merkozy as we know it.

"France's cost of funding will also be impacted. The 10- year government bond yield spread between France and Germany is currently at 1.30 percent and it could increase further. Given the fact that France should refinance around 200 billion euros of bonds during 2012, this could have a significant impact on France's finances for many years to come."

ROBERT LYNCH, HEAD OF CURRENCY STRATEGY, AMERICAS, HSBC

"In the recent past markets have sensed, rightly or wrongly, this tendency for this type of news to sometimes come on Friday and for some authorities to be alerted to it ahead of time. So when you see these headlines the market has gotten a bit sensitive to them. The fact that euro/dollar had rallied so much yesterday and not only couldn't continue to rally but couldn't hold gains had dampened sentiment somewhat. That had made the market more cautious about either establishing new longs into the weekend or holding newly established longs. ... If you had a newly established long from yesterday and not only is it not performing, it's underperforming, that's going to simply force some people to get out of those positions... From a sentiment perspective the notion that some core countries, not Germany, might get downgraded is not a new concept for them to digest, but it doesn't mean there wouldn't be a negative reaction on announcement."

SCOTT SHERMAN, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK

"It'll only increase support for Treasuries. Over the long term I'm not really sure that it makes that much of a difference but when people see these negative headlines they'll move into the safety of U.S. Treasuries. I don't think that fundamentally these things are all that surprising. When they do happen they remind everyone that these things do go on."

RICHARD DRIVER, ANALYST, CAXTON FX, LONDON

"The markets were due a pullback considering the bullishness we have seen this week looked overdone given that this S&P cloud was still overhanging. We all knew S&P was going to get its axe out but it has come a little sooner than expected and it only reinforces our bearish view on the single currency.

DAVID WOO, HEAD OF GLOBAL RATES AND CURRENCY RESEARCH, BANK OF AMERICA-MERRILL LYNCH, NEW YORK

"The headline obviously caused some reaction but, as we all know, the CDS market has already priced in quite a few downgrades. The good news is that since the start of the year, U.S. data has been reasonably strong. If that continues, it could make recession in Europe more shallow ... If U.S. growth holds up and the European funding situation does not deteriorate, I think the pain trade will be a continued rally in risk, given that the market is still defensively positioned. That's the bottom line."

SAMARJIT SHANKAR, MANAGING DIRECTOR, GLOBAL MARKETS, BNY MELLON, BOSTON

"It's been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction. But the Italian auction brought us back to earth and now we face the specter of further downgrades. All flows clearly show the strongest demand is for U.S. Treasuries, JGBs and Swiss bonds. The majority of money managers are playing it very safe, as the whole euro zone region is under suspicion. We're starting to see big portfolio managers isolate the euro zone altogether and look elsewhere. They've by now discounted the fact that Europe is not going to get its act together."

(Reporting by Ellen Freilich)