In its first day of trading following last week’s US credit rating downgrade, the Dow Jones closed down 634 points, or 5.5 percent. US stocks saw their biggest losses in almost three years Monday, after stocks also tumbled in Asia and Europe.
REUTERS – U.S. stocks plunged on Monday, racking up their biggest losses in almost three years as investors fled to the safety of gold and bonds after the downgrade of the U.S. credit rating by Standard & Poor's stoked fears the country is falling back into recession.
Wall Street ended down more than 6 percent while European stocks hit a two-year low. A favored gauge of investor anxiety spiked in a sign investors are afraid of more declines to come. The CBOE Volatility Index surged 50 percent to 48.
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The selling came in heavy trading, with volume of 17.5 billion shares on the New York Stock Exchange, NYSE Amex and Nasdaq, second only to the day after last year's sudden "flash crash."
Investors took shelter in the asset that was downgraded -- choosing U.S. government bonds for their liquidity and perceived high quality.
Investors were struggling to discern the effects of the U.S. credit rating downgrade to AA-plus from AAA, which could hit various components of the vast U.S. financial sector, from mortgage lenders to municipal issuers and insurers.
"It is a panic, and almost by definition it doesn't have an issue. It wouldn't matter what it was," said James Paulsen, chief investment strategist at Wells Capital Management, with over $340 billion in assets under management.
The downgrade -- and threats of subsequent moves by S&P or other rating agencies -- raises uncertainty about the credibility of the United States in the global economy as investors worry about another recession.
Central to S&P's argument was that political paralysis in Washington has reached a point where the government would be unable to deal with worsening deficits and sagging economic growth. This burdens a stock market already skittish after last
week's outbreak of fear.
European Central Bank intervenes to ease market pressure on Spain and Italy
U.S. President Barack Obama blamed the downgrade on political gridlock in Washington and said he would offer more recommendations on how to reduce federal deficits.
"In many ways this is not about the downgrade. I think it's about the underlying fundamentals and issues that are embodied in the downgrade itself," said Jonathan Golub, chief U.S. equity strategist at UBS in New York.
MSCI's all-country world stock index dropped 5.1 percent to its lowest level since September 2010.
Monday's rush for the exits extinguished any relief from earlier news the European Central Bank was buying Italian and Spanish government bonds in the latest move to staunch the euro zone debt crisis.
SEARCH FOR SAFETY
Several major brokerages have in recent days lowered their expectations for U.S. economic growth and share appreciation for 2011 and 2012.
Major holders of US debt
Moody's repeated a warning it could downgrade the United States before 2013 if the fiscal or economic outlook weakened significantly. It said it saw the potential for a new deal in Washington to cut the budget deficit before then.
The Dow Jones industrial average dropped 634.76 points, or 5.55 percent, to 10,809.85. The Standard & Poor's 500 Index slumped 79.92 points, or 6.66 percent, to 1,119.46. The Nasdaq Composite Index skidded 174.72 points, or 6.90 percent, to 2,357.69.
It was the biggest drop for the S&P since December 2008.
Investors looking for a place to park their money pushed into gold, U.S. Treasuries and some safe-haven currencies.
Gold ran up to a record high above $1,700 an ounce. Benchmark 10-year notes at one point soared over two points in price, with yields falling as low as 2.33 percent, the lowest
level since February 2009.
"Treasuries are still a comparatively low-risk asset. I think there's no doubt about that," said Michael Schumacher, a strategist at UBS in Stamford, Connecticut.
The euro slumped to a record low of 1.0640 Swiss francs and last traded down 2.3 percent at 1.07220. It also lost 2 percent versus the yen.
The dollar fell 0.9 percent to 77.68 yen, having slipped to around 77.45 on EBS. It was down 1.5 percent at 0.7557 Swiss franc, after falling to 0.7480 earlier, also a record low.
European shares closed down 4 percent after registering gains on the ECB action. The FTSEurofirst 300 index has lost about 21 percent since a peak in mid-February, putting it in bear market territory.
Date created : 2011-08-08