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Stocks Slump in First US Trading Since Downgrade

Monday, 08 August 2011 06:20 By Christine Hauser and David Jolly, The New York Times News Service | Report
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Wall Street stocks plummeted on Monday as skittish investors, already concerned about the economy, struggled to work out the implications of last week’s unprecedented downgrade of the United States government’s credit rating.

The declines, coming in the first opportunity for investors to sell since Standard & Poor’s cut its rating on the nation’s long-term debt late Friday, followed losses in global markets and set United States equities on track to extend losses that were beginning to recall the days of the 2008 financial crisis. They also reflected anxiety over the United States economy and Europe’s debt woes. The market’s declines grew steadily worse over the course of the afternoon. With less than two hours before the close of the trading session, the broader market as measured by the Standard & Poor’s 500-stock index was down 70.43 points, or 5.87 percent. The Dow Jones industrial average was down 524.49 points, or 4.58 percent, and the Nasdaq was down 152.27 points, or 6.01 percent. Following a dismal opening in the wake of lower European and Asian markets, stocks took a sharper turn downward as Standard & Poor’s announced additional downgrades, including cuts to the debt ratings of the housing giants Fannie Mae and Freddie Mac.

Financial stocks in particular were hammered, falling as much as 10 percent in afternoon trading.

Those stocks were reacting to the European debt problems as well as the downgrade news, said Jason Arnold, an analyst with RBC Capital Markets. But there were also underlying economic problems weighing on the sector, including those related to mortgage repurchase issues.

“For those that have sizeable mortgage repurchase liability exposure, the market is concerned about that as well,” said Mr. Arnold.

Mr. Arnold specifically mentioned American International Group’s lawsuit against Bank of America over hundreds of mortgage-backed securities in what could be the largest such action by a single investor.

Bank of America was down about 18 percent, and Citigroup was down more than 16 percent.

Another analyst noted that the market performance in recent weeks was bringing back echoes of the last financial crisis. The S.& P. 500 was down about 14 percent over the last 11 sessions, and last week was the worst five-day trading period since November 2008.

“The rapidity of the decline and its force now rivals almost anything we’ve seen in the post-war era,” said Dan Greenhaus, the chief global strategist for BTIG, a financial services firm. “We have fallen so far and so quickly that we are up there with the most vicious sell-offs.”

The downgrade of the United States long-term debt to AA+ from AAA has global implications, said Alessandro Giansanti, a credit market strategist at ING in Amsterdam.

“We can see that this may force the U.S. to move more aggressively to cut spending,” he said, something that could drive the already weak economy into recession and weigh on the economies of all of its trading partners. “That’s the main driver” of the stock market declines, he said.

Since two ratings companies merged in 1941 to form Standard & Poor’s, the agency had always given the United States an AAA rating, until Friday. But other agencies, including Moody’s and Fitch, have stuck with their ratings. On Monday, Moody’s released a report discussing the decision, saying the United States has “unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments.”

President Obama said on Monday that the country needs a long-term approach to deficit reduction, but that the markets “continue to believe our credit status is triple-A.”

“That doesn’t mean we don’t have a problem,” he added in a televised speech.

S.& P. had warned investors earlier this year that it would act if Congress did not agree to increase the government’s debt ceiling, basically a borrowing limit, and adopt a long-term plan for reducing its debts by at least $4 trillion over the next decade.

The tension in the markets was palpable on Monday. Doreen Mogavero, a trader at the New York Stock Exchange, said traders had canceled vacations, and the exchange operator brought in extra staff to make sure the systems were working properly, as it anticipated a surge in volumes.

Ms. Mogavero said traders were closely watching the VIX index, a measure of volatility. As she spoke, it was up more than 3 points, to around 36 — double the level it was just a few weeks  ago. By 2 p.m., it was around 40.

The tension in the markets was palpable on Monday. Doreen Mogavero, a trader at the New York Stock Exchange, said traders had canceled vacations, and the exchange operator brought in extra staff to make sure the systems were working properly, as it anticipated a surge in volumes.

Ms. Mogavero said traders were closely watching the VIX index, a measure of volatility. As she spoke, it was up more than 3 points, to around 36 — double the level it was just a few weeks  ago. By 2 p.m., it was around 40.

Gold topped $1,700 an ounce for the first time, and the dollar continued to weaken against most major currencies. The Treasury’s benchmark 10-year note yield was down to 2.37 percent from 2.56 percent on Friday.

Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott, said higher prices for bonds were “a testament to the fact that global investors view U.S. bonds as the safe-haven asset choice.”

Some investors are turning their attention to a meeting of the Federal Reserve this week and whether there will be any new measures to stimulate the economy.

Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company, said the Federal Open Markets Committee was not likely to take action on interest rates, but would most likely discuss what policies would give support to the market.

“The rest of the conversations should happen in Washington,” Mr. Giddis said in a research note. “This country has an economic problem, which can only be fixed with jobs, not governmental liquidity, and that is the one that worries me the most.”

The interest rates on Spanish and Italian bonds plummeted after the European Central Bank expanded its purchases of government debt to support those countries for the first time. The yield on 10-year Spanish bonds dropped by 88 basis points, while comparable Italian yields fell 80 basis points. News agencies cited traders saying the central bank was intervening in the secondary market to buy the securities.

The European Central Bank declined to comment Monday. But in a statement issued late Sunday after an emergency conference call, the bank said it would “actively implement” its bond-buying program to address “dysfunctional market segments.” It did not specify which bonds it would buy, but hinted it would be Spain and Italy by welcoming their efforts to restructure their economies and cut spending.

Previously the bond buying had been limited to bonds from Greece, Portugal and Ireland — the three euro-zone countries that have already received international bailouts. Fears that the bloc’s sovereign debt crisis would spread to the much bigger economies of Italy and Spain had contributed greatly to recent market losses.

European leaders agreed last month to revamp their bailout fund to allow it to purchase bonds on the secondary market, but those powers still have to be drafted and ratified by national parliaments, which will take weeks, at best.

European equities opened higher, but the rally fizzled, dashing hopes that the E.C.B.’s actions would be enough to soothe broader market jitters.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 3.72 percent, while the FTSE 100 index in London fell 3.39 percent.

The German market fell heavily as industrial companies declined, led by the automakers BMW, which fell 8.8 percent, and Daimler, which fell 6.9 percent.

Tammo Greetfeld, an equity strategist at UniCredit in Munich, said German stocks were hit harder than some of their European peers because the country’s exporters are particularly sensitive to global growth prospects, even though their fundamentals are strong.

The euro fell to $1.4216 from $1.4282 late Friday in New York. But the dollar hit new lows against the Swiss franc, falling to around 0.7480 franc, before recovering to 0.7637 franc. The dollar also fell to 77.62 yen from 78.40 yen.

In Asia, the Tokyo benchmark Nikkei 225 stock average fell 2.2 percent. In Hong Kong, the Hang Seng index fell 2.2 percent, and in Shanghai the composite index closed 3.8 percent lower.

United States crude oil futures for September delivery fell 4.2 percent to $83.21 a barrel.

Comex gold futures broke through $1,700 for the first time. Adjusted for inflation, however, gold remains well below its record of more than $2,400 an ounce, according to Capital Economics.

The rout in equities brought global stock markets, as measured by the MSCI all-country index, back to their levels of last September.

Christine Hauser reported from New York and David Jolly from Paris. Bettina Wassener contributed reporting from Hong Kong, Jack Ewing from Frankfurt and Hiroko Tabuchi from Tokyo.

This article, "Stocks Slump in First US Trading Since Downgrade," originally appeared in The New York Times.

David Jolly

David Jolly covers business and finance from Paris. A Texas native and former U.S. marine, he has been with The New York Times organization since joining the International Herald Tribune as an editor in 1999. He previously worked for AP-Dow Jones News Service as a correspondent in Tokyo and New York.

David attended Western Connecticut State University, the School of International and Public Affairs at Columbia University and the University of London Institute in Paris.

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