Stocks slid to their lows of the day Friday amid speculation S&P was close to announcing a reduction in the U.S. AAA credit ranking. Photographer: Jin Lee/AP
Asian stocks dropped for a fifth day, extending the worst global slump since the bull market began in 2009, while U.S. equity futures and oil slid as the loss of America’s top credit rating fueled concern the economic slowdown will worsen. Gold jumped to a record and the Swiss franc climbed.
The MSCI Asia Pacific Index slid 0.7 percent at 9:25 a.m. in Tokyo, adding to last week’s 7.8 percent decline. Standard & Poor’s 500 Index futures lost 1.6 percent, following a two-week rout that dragged the gauge down 11 percent and erased its 2011 gain. The dollar reached an all-time low of 74.85 Swiss centimes before trading at 76.31. Treasuries fell, sending 10-year yields two basis points lower. Oil sank 2.6 percent in New York, copper slumped 0.8 percent in London and gold topped $1,690 an ounce.
A rebound in the S&P 500 faded on Aug. 5 even before S&P announced the one-level reduction to AA+, as concern grew the downgrade’s ripple effects will drag on markets already reeling from a slowdown in economic indicators. Futures pared losses after Group of Seven nations said they will take every action necessary to stabilize financial markets. Members will inject liquidity as needed and act against disorderly currency moves if necessary, Japanese Finance Minister Yoshihiko Noda said.
“Investors should be cautiously positioned,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail Aug. 6. Pimco is the world’s largest bond-fund manager. “The downgrade will be a further headwind to growth,” he wrote. “The once-unthinkable loss of the AAA rating will constitute a further hit to already fragile business and consumer confidence.”
Global Sell-off
About $5.4 trillion in global equity value has been erased since July 26, according to Bloomberg data, after Europe’s debt crisis worsened, reports on U.S. manufacturing and consumer spending showed the world’s largest economy was slowing and a political impasse over the budget deficit brought the American government to the brink of default. The MSCI All-Country World Index fell as much as 0.1 percent today, following an eight-day, 11 percent loss.
Futures on the Dow Jones Industrial Average sank 191 points, or 1.7 percent, to 11,211 and Nasdaq-100 Index futures lost 1.5 percent. The Nikkei 225 Stock Average decreased 1.1 percent, adding to last week’s 5.4 percent slump, the worst since the aftermath of the March 11 earthquake. Australia’s S&P/ASX 200 Index slid 1.7 percent and New Zealand’s benchmark index tumbled 2.8 percent.
Dubai’s DFM General Index lost 3.7 percent yesterday, the most since Feb. 28. Israel’s TA-25 Index plunged the most in almost 11 years, with a 7 percent loss led by Discount Investment Corp.
Investors rushed over the weekend to assess the potential global fallout from the U.S. losing its AAA rating at S&P for the first time.
‘Should Not Panic’
“Investors should not panic,” Charles Reinhard, the New York-based deputy chief investment officer at Morgan Stanley Smith Barney LLC, which oversees $1.7 trillion, said in a telephone interview. “The downgrade is a disappointment, but it will be manageable. Underlying all of this we still have attractive equity valuations and good old fashioned profit growth.”
JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. It would likely increase Treasury yields by 60 basis points to 70 basis points over the “medium term,” JPMorgan’s Terry Belton said on a July 26 conference call hosted by the Securities Industry and Financial Markets Association.
‘Brace for Turmoil’
Societe Generale SA predicted “shock and already shaken confidence in an illiquid market. Brace for turmoil in next few days or weeks,” the French bank’s head of North American research, New York-based Stephen Gallagher, wrote in a note today. SocGen predicted likely downgrades of mortgage financiers Fannie Mae, Freddie Mac and the Federal Home Loan banks as well as clearinghouses and “certain AAA rated insurers.”
BlackRock Inc. (BLK), the world’s largest asset manager, issued a statement saying it has been preparing for the downgrade for a month and will not need to do any “forced selling of securities.” The OCC, which clears and settles all trades on U.S. options exchanges, said in a statement it has “no current plans” to adjust valuations for Treasuries used as collateral.
The U.S. Treasury Department said there is “no justifiable rationale” for S&P’s move as global finance ministry officials prepared responses to the historic announcement. S&P’s officials stood by their decision and laid blame on a political system that failed to adequately address deficit reduction in the compromise law that President Barack Obama signed Aug. 2 to avert a default.
‘Their Own Dynamics’
Billionaire Warren Buffett said S&P erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid its second recession in three years. The U.S. merits a “quadruple A” rating, Buffett, 80, said Aug. 6 in an interview with Betty Liu at Bloomberg Television.
“Financial markets create their own dynamics, but I don’t think we’re facing a double dip recession,” said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. “Clearly what stock markets do have is an effect on confidence, and this sell-off can create a lack of confidence.”
The S&P 500 slumped 7.2 percent last week for its worst plunge since November 2008, during the final four months of the bear market that wiped out 57 percent of the index. Stronger- than-forecast government data on employment growth sparked a 1.5 percent rebound in the index on Aug. 5 before the rally faded as speculation of the reduction in the U.S. rating swirled through the market.
Continued Losses
Former Federal Reserve Chairman Alan Greenspan said he expects stocks to continue their decline after, even as an S&P official predicted little market impact.
“Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said on NBC’s “Meet the Press” program. S&P’s managing director of sovereign ratings, David Beers, said he didn’t expect markets to react significantly when they open.
The two-year Treasury note yield reached a record low of 0.25 percent on Aug. 4 before adding three basis points the following day after the jobs data. Rates on 10-year notes and 30-year bonds decreased to the lowest levels of the year last week. The two-year yield was at 0.27 percent today, while the rate on 10-year notes was at 2.58 percent.
European Markets
The Stoxx Europe 600 Index of stocks sank 9.9 percent last week, also the worst tumble since November 2008, and is down 18 percent from its 2011 high in February. Italian and Spanish sovereign bond yields have surged since a July 21 European Union summit approved a new aid plan for Greece and measures to aid other euro-region countries. Italian 10-year bond yields are up 76 basis points since, while Spanish yields have gained 33 basis points. The difference between 10-year Italian and German yields reached a record 416 basis points last week.
“It’s in Europe and it’s spreading to the U.S.,” Tim Hartzell, who oversees about $350 million as chief investment officer for Houston-based Sequent Asset Management, said in a telephone interview before U.S. equity futures started trading. “It will mean lower earnings and lower stock prices. The countries that kick the can down the road on their finances like the U.S. will see negative pressure on their currencies.”
European Central Bank President Jean-Claude Trichet signaled he’s ready to start buying Italian and Spanish bonds in his riskiest attempt yet to tame the sovereign debt crisis. The ECB said in a statement yesterday it welcomed Italy and Spain’s efforts to reduce their deficits and said it will “actively implement” its bond-purchase program.
Strategists’ Projections
Despite the pullback in stocks, chief strategists at 13 banks from Goldman Sachs Group Inc. to Barclays Plc and UBS AG see the S&P 500 surging 17 percent through Dec. 31, according to the average estimate in a Bloomberg survey. Their projection that the index will reach 1,401 hasn’t budged in four weeks.
Concern that the nation will slip back into a recession has overshadowed an earnings season that has seen per-share profit increase 18 percent among the S&P 500 companies that have released quarterly results since July 11, according to data compiled by Bloomberg. The slump has left the index trading at 13.1 times reported profit, the cheapest since the month the bull market began in 2009.
Crude oil and the Thomson Reuters/Jefferies CRB Index of commodities erased their 2011 gains. Crude for September delivery traded at $84.74 in electronic trading on the New York Mercantile Exchange today, following last week’s 9.2 percent plunge. Copper for three-month delivery fell to $8,968 a metric ton on the London Metal Exchange, extending a three-day loss. Gold for immediate-delivery rose 1.2 percent to $1,684.30 an ounce, after earlier rallying to $1,693.75.
To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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