Dow Jones Down 634.7 Points

Dow closes down 634 points after final plunge [Updated]

August 8, 2011 |  1:12 pm, Los Angeles Times

Markets8-blog

 

The Dow Jones industrial average finished the day down 634.76 points Monday after a full-day sell-off accelerated in the final hour of trading as investors struggled to absorb Standard & Poor’s decision to downgrade the United States’ credit rating.

[Updated, 1:34 p.m. Aug. 8: This post has been updated to reflect the final closing numbers of the Dow Jones industrial average.]

Investors piled out of stocks and into a few “safe havens,” such as gold and Treasury bonds. The appetite for Treasury bonds suggests that the Standard & Poor’s downgrade has not shaken investors’ faith in U.S. bonds.

Market experts said the Monday sell-off was sparked by the S&P announcement but was motivated more by growing concerns about the weakness of the global economy.

“It’s really all about economics,” said Mike Norman, the chief financial strategist at John Thomas Financial.

The Dow ended the day down 634.76 points, or 5.5%, at 10809.85. The broader Standard & Poor’s 500 index fell even more sharply, finishing the day down 79.83 points, or 6.6%, at 1119.55.

“It’s been harried,” said Sal Arnuk, head of Themis Trading, which has its trading floor in Chatham, N.J.

The concern about the U.S. credit rating was amplified when Standard & Poor’s announced Monday morning that it was also downgrading the debt of mortgage giants Fannie Mae and Freddie Mac, which rely on U.S. government guarantees. But traders said much of the pessimism Monday resulted from broader concerns about the economy.

“I don’t think the S&P announcement is the lead director of the day — I just think it is the icing on the cake,” said Jonathan Corpina, a trader on the New York Stock Exchange for Meridian Equity Partners.

Markets have fallen nearly every day for the last two weeks and are now down to levels last reached in September of last year.

With the United States’ credit risk being judged lower by Standard & Poor’s, Treasury bonds might have been expected to lose some of their luster. But  investors still appear to be using Treasuries as a haven amid global economic turmoil. The 10-year Treasury bond was trading at a 2.34% yield, down from 2.56% on Friday, indicating that there was heavy demand for the bonds.

Gold, another haven, saw its value rise nearly 3.9% on Monday.

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Goodbye, AAA

8 August 2011 Last updated at 11:34 ET, BBC News

US unlikely to regain AAA rating soon, says S&P

The US is unlikely to see its long-term credit rating return to AAA any time soon, ratings agency S&P has said.

Its comments came as it downgraded the state-backed mortgage giants Fannie Mae and Freddie Mac because of their “direct reliance on the US government”.

It also lowered ratings for clearing houses and other institutions linked to long-term US debt from AAA to AA+.

Late on Friday, the agency downgraded the US’s top-notch AAA rating for the first time in its history.

But US Treasury Secretary Timothy Geithner criticised the decision.

“I think S&P has shown really terrible judgement and they’ve handled themselves very poorly, and they’ve shown a stunning lack of knowledge about basic US fiscal math,” Mr Geithner told NBC on Sunday.

“I think they drew exactly the wrong conclusion.”

‘Polarised views’

In a conference call on Monday, David Beers, S&P’s head of sovereign ratings, said: “We still think that the risks to the rating are still pitched to the downside – that’s why we have a negative outlook. We don’t anticipate a scenario at the moment in which the US would quickly return to AAA.”

He went on: “If [there were] broader consensus among parties about how to make fiscal policy choices over the medium-term horizon and in turn that translated into a more substantial and more robust fiscal stimulation package, those two things could together in time lead to the rating returning to AAA.

“But given the nature of the debate currently in the country, with the polarisation of views across the country right now, we don’t see anything immediately on the horizon that would make this the most likely scenario.”

US markets were lower on Monday in the first trading session after S&P downgraded the US economy.

The Dow Jones was down 2.4%, while the Nasdaq fell 3.2%

U.S. Loses AAA Credit Rating

S&P downgrades U.S. credit rating

By Charles Riley @CNNMoney August 5, 2011: 10:46 PM ET

NEW YORK (CNNMoney) — Credit rating agency Standard & Poor’s on Friday downgraded the credit rating of the United States, stripping the world’s largest economy of its prized AAA status.

In July, S&P placed the United States’ rating on “CreditWatch with negative implications” as the debt ceiling debate devolved into partisan bickering.

To avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a “credible” plan to tackle the nation’s long-term debt.

In its report Friday, S&P ruled that the U.S. fell short: “The downgrade reflects our opinion that the … plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”

A Treasury Department spokesman pushed back on the rating change, saying that S&P’s analysis was flawed.

A source familiar with the matter said S&P initially miscalculated the growth trajectory of the nation’s debt, and then went ahead with its downgrade anyway.

The source also said S&P didn’t give enough credit for the debt-ceiling compromise, which paved the way for more than $2 trillion in spending cuts over the next 10 years.

However, one of S&P’s explicit criticisms of the compromise was that it didn’t address the biggest drivers of the nation’s debt — Social Security and Medicare — and didn’t allow for additional tax revenue. (“What’s wrong with the debt ceiling deal?”)

John Chambers, Head of Sovereign Ratings for S&P, told CNN that though S&P didn’t have a specific target in mind, the total debt reduction package was not sufficient. Chambers also noted that the plan did not take steps in the near term to boost economic growth.

Rating agencies — S&P, Moody’s and Fitch — analyze risk and give debt a “grade” that reflects the borrower’s ability to pay the underlying loans.

The safest bets are stamped AAA. That’s where U.S. debt has stood for years. Moody’s first assigned the United States a AAA rating in 1917. The country’s new S&P rating is AA+ — still strong, but not the highest.

The downgrade puts the U.S. debt rating on par with that of Belgium, but below countries like the United Kingdom and Australia.

In the days after lawmakers managed to strike a debt-ceiling deal, the two other major rating agencies have both said the deficit reduction actions taken by Congress were a step in the right direction.

On Tuesday, Moody’s said the United States will keep its sterling AAA credit rating, but lowered its outlook on U.S. debt to “negative.”

Even after a downgrade, the United States will likely still be able to pay its bills for years to come and remains a good credit risk.

A downgrade really just amounts to one agency’s opinion. Federal Reserve Chairman Ben Bernanke articulated that view in April when S&P placed the United States on credit watch. “S&P’s action didn’t really tell us anything,” Bernanke said. “Everybody who reads the newspaper knows that the United States has a very serious long-term fiscal problem.”

Investors have limited options for making safe investments, and Treasuries are effectively as liquid as cash. And other big countries have been downgraded and were still able to borrow at low rates.

At the same time, some experts warn that a downgrade could gum up the banking system and ripple out onto Main Street. Treasuries are used as collateral in many transactions between financial institutions and grease the skids of lending.

Shortly after the downgrade, the Federal Reserve, FDIC and other bank regulators moved to blunt the affect of the action on the banking system. In a joint release, the agencies said they would continue to treat Treasuries and other securities issued by government-sponsored entities (such as Fannie Mae and Freddie Mac) the same as before they were downgraded. Treasuries are often used as collateral for short-term lending among banks and other financial institutions.

Consumers and investors could feel the impact of a downgrade. Interest rates on bonds could rise, and rates on mortgages and other types of loans along with them.

Government-backed agencies like Fannie Mae and Freddie Mac may also be downgraded. It’s also possible that some state and local governments could also face a downgrade.

And investment decisions would become complicated for large institutional investors that are required to hold highly-rated securities.

U.S. Just Barely Avoids Default

Obama to sign US debt ceiling bill into law

President Obama to authorise measure to avert US debt default and cut spending after weeks of political wrangling.
Last Modified: 02 Aug 2011 17:38, Al Jazeera
The eleventh hour deal came after weeks of political wrangling between Republicans and Democrats [GALLO/GETTY]

The US Senate has approved a bill that raises the country’s borrowing limit and averts a possible default, after the lower house of congress approved it on Monday following weeks of political wrangling.

The upper house of congress passed the measure by 74 votes to 26. It required 60 votes to pass.

Barack Obama, the US president, is set to sign the bill into law following Tuesday’s vote.

The earlier passage of the bill by the Republican-controlled House came a day before the deadline to lift the debt ceiling, with agreement between Republicans and Democrats over the $2.1 trillion deficit-cutting plan reached over the weekend.

In remarks delivered immediately following the passage of the bill in the senate, Obama said that “both parties need to take responsibility for improving this economy”, and emphasised the need for congress to work towards passing stalled trade bills that created more jobs. He also said that he wanted to see unemployment benefits extended.

He said that lawmakers need to continue to work towards finding a balanced approach to reducing the deficit, including some adjustments to healthcare benefit plans for the elderly and reforming the tax code so that the wealthy pay more.

“We can’t balance the budget on the backs of the very people who have borne the biggest brunt of this recession,” Obama said.

The White House has indicated that Obama will sign the bill as soon as it lands on his desk.

No immediate tax increases

The vote in the Senate had been virtually guaranteed to pass the bill, with Harry Reid, the Democratic majority leader, and Mitch McConnell, the Republican minority leader, both backing it.

It passed with support from 45 Democrats, 28 Republicans and an independent. Nineteen Republicans, six Democrats and an independent voted no.

The bill, which contains no immediate tax increases, raises the borrowing limit into 2013, calls for spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

It does not spell out where the spending cuts should be made and instead puts off decisions about which programmes will bear the brunt.

World markets were initially down, despite the news, with the US Dow Jones Industrials bearish for the eight straight day on the back of spreading debt troubles in Europe and a decline in US consumer spending.

Al Jazeera’s Patty Culhane, reporting from Washington DC, said that there was a lot of public anger over the way that the US congress went about dealing with this crisis.

“If you ask the American public across the board they blame anybody who currently holds elected office in Washington … what is possibly going to impact the president here is what he’s done to his base,” she said.

“You’ll hear from lawmakers here on Capitol Hill, especially the more on the far left [that] they feel as if the president simply walked up to the negotiating table and got nothing in return from the Republicans. They feel that he basically threw the Democrats here on Capitol Hill under the bus, is an expression I’ve heard a couple of times.”

Credit rating fears

On Tuesday, Timothy Geithner, the US treasury secretary, said that it was unclear if the passage of the debt ceiling deal would ensure that the country did not lose its prized AAA rating from international credit ratings agencies.

The Fitch ratings agency retained its AAA rating for the US immediately following the passage of the bill, but more prominent firms Moody’s and Standard & Poor’s were yet to report.

The deal falls short of the $4 trillion in fiscal consolidation that rating agencies had indicated would be sufficient to retain the current rating.