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The markets ended the day deep in the red after Standard & Poor's cut its outlook for U.S sovereign debt.
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The Dow Jones Industrial Average was off 140 points, or 1.1%, to 12,202, the S&P 500 fell 14.5 points, or 1.1%, to 1,305 and the Nasdaq Composite slipped 29.3 points, or 1.1% to 2,735. The FOX 50 slid 7.9 points to 917.
Standard and Poor's affirmed its AAA rating for U.S. sovereign debt, but adjusted its long-term outlook from stable to negative, meaning there is at least a 33% chance that company will downgrade the country's long-term credit rating.
The credit-rating firm cited "very large [U.S. government] budget deficits and rising government indebtedness" in making its decision.
"We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013," the ratings agency said in a press release.
The news spooked the markets, sparking broad losses.
“A downgrade by S&P is the first step in a series of steps that could have catastrophic effects of the cost of doing business domestically and globally,” said Peter Kenny, managing director at Knight Capital Group.
“If there is a downgrade at any point ... it could be very debilitating.”
Echoing Kenny's concern, Pavlina Tcherneva, an economics professor at Franklin and Marshall College, said "a potential downgrade will pressure the U.S. government to force even more aggressive austerity policies."
However, Tcherneva notes it would be very unlikely for the U.S. to default on its debt -- unless Congress fails to extend the debt limit -- because of its ability to issue currency.
"The [Federal Reserve], in coordination with the Treasury, always guarantees government debt," she said.
The price of long-term U.S. government debt fell following the announcement as traders priced in an increased level of risk, but then swung into positive territory hours later. The yield on 10 and 30-year Treasury bonds, which moves inversely to the price, slipped slightly.
The VIX, which is gauge of stock market volatility, lurched as much 21% higher. Gold prices pared losses and traded higher as traders sought-out the safe-haven asset. The metal gained $7.00, or 0.47%, to $1,492 a troy ounce.
Energy issues such as Chevron (NYSE:CVX) and Schlumberger (USE:SLB) performed the worst on the day.
European markets slid to a three-week low Monday amid concerns the sovereign debt crisis that has hit several euro zone countries would worsen. Indeed, the euro fell 1.3% against the U.S. dollar on fears Greece could default on its debt.
Traders were also keeping a close eye on corporate earnings.
Citigroup (NYSE:C) unveiled first-quarter profits of 10 cents a share, or $3 billion, beating analysts' calls for earnings of 9 cents a share. However, the banking-giant's revenues fell 22% to $19.7 billion, missing expectations of $20.55 billion.
Eli Lilly (NYSE:LLY) said its first-quarter profits fell 15% to $1.24 a share, excluding one-time charges -- beating Wall Street's forecast of $1.17.
In energy markets, oil prices were off more than $3.00 last week amid concerns high-prices would crimp demand for crude. However, prices are still up 17% from the beginning of 2011.
Light, sweet crude settled lower by $2.54, or 2.3%, to $107.12. Prices at the pump have topped the $4 a gallon level in six states and the nation's capital as upward pressure in the futures markets has made its way into the consumer market. A gallon of gas costs $3.83 on average nationwide, up from $3.54 last month and $2.87 last year, according to the AAA Fuel Gauge Report.
Even as fears of a supply disruption roiled the energy market in recent weeks, Saudi Arabia -- the world's largest oil exporter -- cut oil output by 800,000 barrels per day, citing soft demand for crude.
On the mergers and acquisitions front, Johnson and Johnson (NYSE:JNJ) is considering acquiring medical-device maker Synthes in a deal that could be worth as much as $20 billion, according to a report by The Wall Street Journal.
Nasdaq OMX Group (NASDAQ:NDAQ) and IntercontinentalExchange (NYSE:ICE) are still actively pursuing an acquisition NYSE Euronext (NYSE:NYX) after the parent of the New York Stock Exchange rebuffed the rival bid. Indeed, Nasdaq has had introductory meetings with the Department of Justice regarding the potential takeover, and could begin formal discussions as early as Monday, sources told FOX Business' Charlie Gasparino.
If Nasdaq/ICE get a nod from regulators, the next step would be securing financing and developing a reverse-termination agreement wherein NYSE would get paid a substantial fee if the deal fell through, the sources said.
General Motors (NYSE:GM) said it plans on raising its prices by $123 per vehicle on average due to rising material costs.
Gap (NYSE:GPS) was cut from 'hold' to 'sell' by Goldman Sachs, sending shares sinking more than 3%.
Amarin's (NASDAQ:AMRN) triglyceride-reducing drug, AMR101, met its primary and secondary goals in a phase 3 trial, sending shares soaring more than 90%.
Community Health Systems (NYSE:CYH) sweetened its offer for Tenet Healthcare (NYSE:THC) from $5 a share in cash and $1 in stock to $6 a share in cash.
The English FTSE 100 was off 2.1% to 5,870, the French CAC 40 fell 2.4% to 3,881 and the German DAX slid 2.1% to 7,027.
In Asia, the Japanese Nikkei 225 edged lower by 0.36% to 9,556 and the Chinese Hang Seng slipped 0.74% to 23,830.