Market Recap: FOMC Announces Operation Twist, Banks Tumble, Investors Flee Sovereign Debt
Markets closed down on Wall Street today: Dow -2.49%, S&P -2.94%, Nasdaq -2.01%, Oil -2.01%, Gold -1.17%.
On the commodities front, Oil (NYSE:USO) fell to $85.17 a barrel. Precious metals also declined, with Gold (NYSE:GLD) falling to $1,788.00 an ounce while Silver (NYSE:SLV) fell 1.14% to $39.36 an ounce.
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Today’s markets were down because:
1) Greece. The country’s sovereign debt crisis continues to be a drag on markets. Though it now seems likely Greece will receive its next 8 billion-euro loan payment, economists say that is only enough to prevent default for a few months. Meanwhile, the IMF has recognized the need for banks to boost their capital in order to withstand potential losses incurred by the sovereign debt crisis sweeping Europe. And with private investors wary of putting their money in unstable financial markets, public authorities may have to get involved. Just today, ING (NYSE:ING) announced that it has substantially cut its holdings of Italian debt in hopes of placating investors nervous about the firm’s exposure to the European sovereign debt crisis.
2) Banks. Moody’s went on a cutting spree, lowering its rating on Wells Fargo (NYSE:WFC) from A1 to A2, as the ratings firm thinks it’s unlikely the government will step in to support banks the way it did in 2008 should things get rough again. For that reason, Moody’s also downgraded Bank of America (NYSE:BAC) from A2 to Baa1. While Moody’s maintained its rating on Citigroup’s (NYSE:C) stand-alone credit profile, it downgraded its holding company’s short-term rating from Prime-1 to Prime-2. Not to be out done, Standard & Poors (NYSE:MHP) cut its ratings on 15 Italian banks following its downgrade of Italian debt yesterday. Shares of other financial giants, including J.P. Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS), all reached new 52-week lows.
3) FOMC. Markets moved sharply lower this afternoon following an announcement from the Federal Open Market Committee that the Federal Reserve will replace some bonds in their portfolio with longer-term Treasuries in an effort to reduce borrowing costs. The central bank will buy $400 billion worth of bonds with maturities of six to 30 years between now and June 2012, while simultaneously selling an equivalent amount of debt maturing in three years or less as part of what’s being called “Operation Twist.” But experts question whether the move will be effective in encouraging businesses and consumers to put more money into the economy, especially considering that interest rates have been near record lows since 2008 but have yet to entice consumers to take out loans.