3 Reasons Markets Took A Beating After S&P Downgrade U.S. Government Debt
Markets closed down on Wall Street today: Dow -5.52, S&P -6.63%, Nasdaq -6.9%, Oil -7.09%, Gold +4%.
Today’s markets were down because:
1) S&P. Late Friday, Standard & Poor’s downgraded the credit rating on U.S. government debt for the first time. While bond prices actually gained despite the news, and foreign investors reaffirmed their confidence in U.S. Treasuries, the news still caused widespread panic, and global markets took a beating as people flocked to safe havens like gold, which climbed above $1,700 an ounce today. Fannie Mae and Freddie Mac were also downgraded, leaving some investors afraid that interest rates on mortgages could spike. The day was a ‘sell now, ask questions later’ kind of day that had investors fleeing without any true understanding as to why. Even President Obama’s mid-day speech in which he said, “Our problems are imminently solvable,” wasn’t enough to save markets from their single worst day of trading since 2008.
2) ECB. With the downgrade casting a dark shadow over global markets, it didn’t much matter that the European Central Bank began buying Spanish and Italian bonds, pushing down yields and alleviating fears that Spain’s and Italy’s debt crises would continue to barrel on, out of hand, without any real efforts being made to stop them. Combined, Spain and Italy account for nearly 30% of the euro zone’s gross domestic product, so while the ECB will have to buy billions more euros worth of sovereign debt, it’s a necessary measure in order to prevent Spain’s and Italy’s floundering economies from contaminating fellow members of the European Union. But while the positive news that the ECB took a big step forward in beginning to buy Spanish and Italian bonds gave European markets a small boost in the morning, Standard and Poor’s news had a major depressing effect on markets around the world.
3) BAC. As one of the day’s most heavily traded stocks, Bank of America’s (NYSE:BAC) huge decline today helped push the Dow below 11,000 for the first time since November of last year. Bank of America’s share price had fallen over 20% by the time markets closed Monday on news that AIG (NYSE:AIG) was suing the bank for over $10 billion for allegedly overvaluing residential mortgage-backed securities it sold to the insurance company between 2005 and 2007. Other banks (NYSE:KBE) such as Citigroup (NYSE:C), JP Morgan (NYSE:JPM), Wells Fargo (NYSE:WFC), and Goldman Sachs (NYSE:GS) also took huge blows.