U.S. Indexes Plunge 4% on Growing Economic Worries

Darlington Musarurwa
08 Aug, 2011
New York City

The S&P 500 and the Nasdaq dropped 4% in volatile trading after market pessimism grew and investors reacted to the loss of highest rating for the U.S. debt. European markets fell after G7 statement failed to provide more clarity and Germany resisted calls to increase the size of rescue fund.

[R]10:30 AM – The S&P 500 and the Nasdaq dropped more than 3% in volatile trading after market pessimism grew and investors reacted to the loss of highest rating for the U.S. debt. European investors were also nervous after G7 statement failed to provide more clarity and Germany resisted calls to increase the size of the rescue funds and the ECB pledged to defend bond market.[/R]

The U.S. indexes opened sharply lower as market pessimism dictated trading tone in the early morning. The Friday downgrade of the U.S. debt and European markets struggled after the European rescue fund and the ECB stepped up to support the bond market.

The Dow fell 203.29 or 1.8% to 11,241.32, the S&P 500 index declined 37.94 or 3.1% to 1,161.44 and the Nasdaq dropped 3.3% to 2,447.38.

The indexes in Paris, Frankfurt, Stockholm and Zurich fell as much as 3% in the morning and recovered to a loss of 1.5% but edged lower towards to close near 2.2%.

Investors were able to react for the first time after late Friday U.S. debt rating was downgraded the U.S. debt rating. The decision was anticipated but not expected till late September.

S&P left its view on the short term debt unchanged and lowered only the long term debt rating and cited that the U.S. needs at least $4 trillion in spending cuts or revenue increase to meet lower its $14 trillion in debt.

In addition, German Chancellor Angela Merkel resisted the calls to increase European rescue fund size from the current 440 billion euros. And, over the weekend G7 meeting of ministers also pledged to support liquidity in the financial markets.

Bond yields of Spain and Italy tightened a fraction but still traded near 6% after a statement from the emergency meeting of the Governing Council of the European Central Bank that it will actively implement its bond purchase program. Market took that as a sign that the central bank was supporting the Spanish and Italian bonds today.

Italian bond yield dropped 79 basis points to 5.35% and Spanish bond yield fell 80 yields to 4.24%.

Indexes in Japan and Asia declined after late Friday Standard & Poor’s cut rating on the U.S. debt from its highest AAA rating to AA+.

The other two agencies left the rating unchanged on August 2 after the U.S. lawmakers struck a debt and spending agreement.

The dollar declined 0.5% against the Swiss franc and dropped 0.7% against the yen. The Swiss franc fetched 74.85 centimes against one euro.

Gold gained 3% to $1,715.50 an ounce and silver added 5% to $40.33 an ounce and oil fell $4.02 to $82.89 a barrel.