Aug. 8 (Bloomberg) -- Peter Fisher, head of fixed income at BlackRock Inc., talks about Standard & Poor’s decision to cut the U.S. credit rating, and its impact on markets and investment strategy. Fisher speaks from New York with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Aug. 7 (Bloomberg) -- John Chambers, chairman of Standard & Poor’s sovereign debt committee, talks about S&P's downgrade of its U.S. credit rating. He speaks with Bloomberg's Adam Johnson. (Excerpt. Source: Bloomberg)
Aug. 8 (Bloomberg) -- Daniel Mitchell, a senior fellow at the Cato Institute, talks about Standard & Poor's decision to cut the U.S.'s long-term debt rating. Nick Maroutsos, a portfolio manager and co-founder at Kapstream Capital in Sydney, talks about the implications of S&P's move for global financial markets. Mitchell and Maroutsos speak with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Asian stocks dropped, extending the worst global slump since the bull market began in 2009, while U.S. equity futures, 30-year Treasuries and oil slid after the loss of America’s top credit rating. Gold jumped to a record and the Swiss franc climbed to an all-time high against the dollar.
The MSCI Asia Pacific Index slid 1.5 percent at 11:20 a.m. in Tokyo. Standard & Poor’s 500 Index futures lost 1.8 percent, following a two-week rout that dragged the gauge down 11 percent and erased its 2011 gain. The dollar reached an all-time low of 74.85 Swiss centimes before trading at 76.15. Treasury 30-year yields climbed four basis points. Oil sank 2.9 percent in New York, while immediate-delivery gold topped $1,690 an ounce.
Group of Seven nations said they will take every action necessary to stabilize financial markets after S&P lowered the U.S. rating by one level to AA+, while the European Central Bank signaled it’s ready to start buying Italian and Spanish bonds to stem contagion. G-7 policy makers held emergency conference calls over the weekend as they sought to stave off a collapse in investor confidence that has already wiped out about $5.4 trillion in global equity values since July 26.
“Investors should be cautiously positioned,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. inNewport Beach, California, wrote in an e-mail Aug. 6. Pimco is the world’s largest bond-fund manager. “The downgrade will be a further headwind to growth,” he wrote. “The once-unthinkable loss of the AAA rating will constitute a further hit to already fragile business and consumer confidence.”
More than eight shares fell for each one that rose on MSCI’s Asia Pacific Index, which declined 7.8 percent last week, the steepest loss since October 2008. The MSCI All-Country World Index fell 0.1 percent today, following an eight-day, 11 percent slump spurred by a worsening European debt crisis worsened and reports on U.S. manufacturing and consumer spending that showed the world’s largest economy was slowing.
Japan’s Nikkei 225 (NKY) Stock Average decreased 1.3 percent, adding to last week’s 5.4 percent slump, the worst since the aftermath of the March 11 earthquake. Australia’s S&P/ASX 200 Index slid 0.8 percent, South Korea’s Kospi Index dropped 1.6 percent and Hong Kong’s Hang Seng Index tumbled 2.8 percent.
The S&P 500 slumped 7.2 percent last week for its worst plunge since November 2008, during the final four months of the bear market that wiped out 57 percent of the index. Stronger- than-forecast government data on employment growth sparked a 1.5 percent rebound in the index on Aug. 5 before the rally faded as speculation of the reduction in the U.S. rating swirled through the market.
Futures on the Dow Jones Industrial Average sank 189 points, or 1.7 percent, to 11,213 and Nasdaq-100 Index futures lost 1.5 percent. Investors rushed over the weekend to assess the potential global fallout from the U.S. losing its AAA rating at S&P for the first time. Former Federal Reserve Chairman Alan Greenspan said he expects stocks to continue their decline.
“Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said on NBC’s “Meet the Press” program.
Investors should “brace for turmoil” in the next few days or weeks, Societe Generale SA’s head of North American research, New York-based Stephen Gallagher said. Mortgage financiersFannie Mae, Freddie Mac and the Federal Home Loan banks as well as clearinghouses and “certain AAA rated insurers” may face likely downgrades, the brokerage predicted.
BlackRock Inc. (BLK), the world’s largest asset manager, issued a statement saying it has been preparing for the downgrade for a month and won’t need to do any “forced selling of securities.” The OCC, which clears and settles all trades on U.S. options exchanges, said in a statement it has “no current plans” to adjust valuations for Treasuries used as collateral.
“Investors should not panic,” Charles Reinhard, the New York-based deputy chief investment officer at Morgan Stanley Smith Barney LLC, which oversees $1.7 trillion, said in a telephone interview. “The downgrade is a disappointment, but it will be manageable. Underlying all of this we still have attractive equity valuations and good old fashioned profit growth.”
Billionaire Warren Buffett said S&P erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid its second recession in three years. The U.S. merits a “quadruple A” rating, Buffett, 80, said Aug. 6 in an interview with Betty Liu at Bloomberg Television.
Politics to Blame
The U.S. Treasury Department said there is “no justifiable rationale” for S&P’s move. Officials from the ratings company stood by their decision and laid blame on a political system that failed to adequately address deficit reduction in the compromise law that President Barack Obama signed Aug. 2 to avert a default.
The two-year Treasury note yield was at 0.27 percent today after reaching a record low of 0.25 percent on Aug. 4. The rate on 30-year notes was at 3.89 percent, having climbed 22 basis points in two days, the biggest increase since July 2009. Treasury 10-year yields rose two basis points to 2.58 percent.
The cost of insuring Asia-Pacific corporate and sovereign debt from default surged to the highest in more than a year. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose three basis points to 136 basis points, Royal Bank of Scotland Group Plc. prices show. The benchmark is headed for its highest close since July 7, 2010, CMA prices show.
“The market is very nervous and there is little evidence of renewed risk appetite,” said Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. “Investors are firmly on the sidelines until more clarity and direction reappears.”
The Dollar Index dropped 0.5 percent today, as the U.S. currency retreated 0.4 percent to 78.06 yen and fell 0.5 percent against the euro. G-7 members will inject liquidity as needed and act against disorderly currency moves if necessary, Japanese Finance Minister Yoshihiko Nodasaid.
The euro was stronger against 13 of its 16 major counterparts after the ECB said in a statement yesterday it welcomed Italy and Spain’s efforts to reduce their deficits and said it will “actively implement” its bond-purchase program in another attempt to tame the sovereign debt crisis.
The Stoxx Europe 600 Index of stocks sank 9.9 percent last week, also the worst tumble since November 2008, and is down 18 percent from its 2011 high in February.
Italian and Spanish sovereign bond yields have surged since a July 21 European Union summit approved a new aid plan for Greece and measures to aid other euro-region countries. Italian 10-year bond yields are up 76 basis points since, while Spanish yields have gained 33 basis points. The difference between 10- year Italian and German yields reached a record 416 basis points last week.
“It’s in Europe and it’s spreading to the U.S.,” Tim Hartzell, who oversees about $350 million as chief investment officer for Houston-based Sequent Asset Management, said in a telephone interview. “It will mean lower earnings and lower stock prices. The countries that kick the can down the road on their finances like the U.S. will see negative pressure on their currencies.”
Oil for September delivery traded at $84.34 a barrel in electronic trading on the New YorkMercantile Exchange today, following last week’s 9.2 percent plunge. Gold for immediate- delivery rose 1.4 percent to $1,687.20 an ounce, after earlier rallying to $1,693.75. Cash silver jumped 4.7 percent to $40.1588 an ounce.