Deja Vu: Dow Crumbles 635 After Economic, Debt Fears Engulf Wall Street

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Published August 08, 2011

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After closing out the worst week since 2008, Wall Street was once again pummeled on Monday after global sovereign debt and economic fears sent traders fleeing equities with few shelters in sight. 

Today's Markets

The Dow Jones Industrial Average plunged 635 points, or 5.6%, to 10,810, the S&P 500 tumbled 79.9 points, or 6.7%, to 1,119 and the Nasdaq Composite dipped 174.7 points, or 6.9%, to 2,358. The FOX 50 sank 50.7 points, or 5.9%, to 814. 

Volatility has been extremely high in recent trading sessions. The selloff over the past two weeks has been so furious in fact that "its force now rivals almost anything weve seen in the post war era," according to Daniel Greenhaus, chief global strategist at BTIG. The VIX, often referred to as a fear gauge, spiked 45% to a 52-week high.  

The selloff was broad, with every major sector taking deep losses.  In a sign of the depth of the selling, 98% of the volume on the New York Stock exchange was in declining shares. The Dow closed below 11,000 for the first time since October 2010, and every blue chip ended in the red. 

Financial shares like Dow-component Bank of America (BAC) and Citigroup (C) took the biggest hit.  The cost to insure the debt of major banking institutions skyrocketed as concerns spread that the institutions may need to seek fresh capital. Bank of America quickly spoke out against the concerns, saying it has sufficient capital, but it couldn't stem the 19% slide its stock took. 

Despite the steep retreat from equities, some market participants were optimistic that markets are in the process of bottoming out. 

Were experiencing the market bottom right now, Paul Dietrich, CEO and co-chief investment officer at Foxhall Capital Management, told FOX Business. He cited leading indicators like auto sales and sales tax revenues. 

I think well bounce around the bottom for a while but I believe over the next quarter or two you will start seeing a movement up of consumer spending.

For the first time in history, S&P cut America's top-notch credit rating one notch to AA-plus from AAA after the close of trading on Friday.  The ratings company also said Monday it would slice Fannie Mae and Freddie Mac's debt rating because the mortgage companies directly rely on the U.S. government. 

S&P's move came as a result of concerns over the country's substantial public debt burden and deep divides within Congress that almost sparked an unprecedented default on U.S. sovereign debt.  Moody's Investor Service, another ratings company, affirmed American's AAA rating, while Fitch is still performing a review. 

Many large investors noted the short-term impact of the downgrade may be muted, however, it could foreshadow deeper economic issues. 

BlackRock said in a release the move by S&P "does not imply a fundamental increase in risk" and shouldn't prompt investors to "change their behavior solely on the downgrade."  However, the company that manages $3.7 trillion in assets warned that "continued economic weakness and regulatory uncertainty ... may provide a signal to some investors to reassess their risk appetite."

A round of disappointing economic data, capped with a mixed monthly employment report has weighed heavily on sentiment in recent weeks.  There are only a handful of data releases scheduled for the first half of the week, however, traders are expected to pay close attention to the Federal Reserve's statement on Tuesday to see if the central bank signals another round of quantitative easing. 

Market participants will also be watching a slew of economic data slated for release by China overnight, according to Peter Boockvar, managing director at Miller Tabak+Co. China is one of the world's largest economies and can have a drastic impact on global markets. 

Global Governments Act

Meanwhile, global governments acted on Sunday to try to stem market fears across the world.  The European Central Bank said it was prepared to "actively implement" a program by which it would purchase Italian and Spanish debt.  European credit markets have been rattled as debt worries have cascaded from smaller economies like Greece to more substantial ones like Italy.  

The Group of 7 finance ministers also made a statement late Sunday, saying it was prepared to take whatever steps are necessary to calm global markets that were slammed last week. 

Still, many market participants questioned what actions global governments would be able to take to tame tumultuous markets. The statement by G7 "sought to bolster confidence but offered only consoling words," analysts at Barclays Capital wrote in a note to clients. 

The selloff on Monday comes on the heels of the steepest retreat for Wall Street since the financial crisis in 2008. The broad S&P 500 plunged 7.2%, the Dow shed 5.8%, and the Nasdaq plunged 8.1%.

In a sign of the uneasiness on Wall Street, gold, seen as a safe haven, has continually leaped to record highs.  The precious metal soared $61.40, or 3.7%, to $1,713 a troy ounce -- breaking the $1,700-mark for the first time. In fact, gold prices surpasses platinum prices for the first time since 2008 on Monday. 

Energy markets followed equity markets deep into the red. 

Light, sweet crude dipped $5.57, or 6.4%, to a new 2011 closing low of $81.31 a barrel. Wholesale RBOB gasoline slid 11 cents, or 4.1%, to $2.69 a gallon. 

The U.S. dollar gained 0.15% against a basket of world currencies, while the euro plummeted 1.2% against the greenback. 

Prices at the pump moderated somewhat last week following the selloff in the futures markets.  A gallon of regular costs $3.66 on average nationwide, down from $3.71 last month, but considerably more than the $2.78 drivers paid last year, according to the AAA Fuel Gauge report. 

Corporate News

Berkshire Hathaway made a $3.3 billion bid for Transatlantic Holdings (TRH), topping two other takeover offers. 

Foreign Markets

The English FTSE 100 slid 3.4% to 5,069, the French CAC 40 tumbled 4.7% to 3,125 and the German DAX plunged 5% 5,923. 

In Asia, the Japanese Nikkei 225 plummeted 2.2% to 9,098 and the Chinese Hang Seng sank 2.2% to 20,491. 

 

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http://www.foxbusiness.com/markets/2011/08/08/us-stock-futures-global-shares-sink-after-downgrade/