Monday, August 8, 2011


U.S. stocks fell and gold surged in whipsaw Monday trading, as investors fled from risky assets in the first activity since Standard & Poor's downgraded the federal government's credit rating late Friday.
The Dow Jones Industrial Average dropped 269 points, or 2.3%, to 11175 in late morning action, though the measure was above session lows reached shortly after 10:30 a.m., EDT. The lows came shortly after S&P followed up its weekend government downgrade with similar actions on the debt of Fannie Mae and Freddie Mac, the two troubled mortgage-finance agencies.
Investors' flight from risk was clearly visible in the first trading since S&P's downgrade of the U.S. credit rating to double-A-plus from triple-A. Gold futures soared above $1,705 an ounce as investors sought assets viewed as safe havens. One winner was U.S. Treasurys, which remained a haven for many investors despite the downgrade. Yield on the 10-year note fell to 2.4157% in recent action.
"It does have the feeling of panic selling," said Hank Smith, chief investment officer of equities at Haverford Investments. "The bond vigilantes have been replaced with 'risk on, risk off' vigilantes. How else do you explain a downgrade of your debt and yields go down?"
In preparation for Monday's market activity, the New York Stock Exchange invoked the little-used Rule 48 before the start of trading. The procedure lets market makers refrain from disseminating price indications ahead of the bell, making it easier and faster to open trading in the stock market.
The Standard & Poor's 500 stock index tumbled 33 points, or 2.7%, to 1167, with financial and energy stocks falling hardest. The Nasdaq Composite slumped 72 points, or 2.8%, to 2461. The declines set up major stock indexes to extend last week's steep losses.
Traders said the fact that the swoon comes right on the heels of the Dow's biggest weekly point loss since the financial crisis in 2008 was setting up many market participants for forced sales and margin calls.
"There is a lot of forced liquidation," said Lorenzo Di Mattia, manager of Sibilla Global Fund, and such actions "might last another day perhaps."
The Dow fell 5.8% last week as investors lost faith in European leaders' ability to stave off a debt crisis and as fears grew that the economic slowdown would deepen into a recession. Last week's declines sent the broader S&P 500 to a 7.2% loss and the Nasdaq Composite to fall 8.1%. All three major U.S. stock indexes are in negative territory for 2011.
Many market participants were still hopeful that stocks could snap back from Monday's losses, which they viewed as a buying opportunity. The late-morning paring of steep, early losses came after word that President Obama intended to deliver a statement at 1 p.m., EDT.
"It's only one rating agency," said Bill McNeil, managing director of trading at HTG Capital Partners in Chicago. "If other follow that would be a bigger problem."
The U.S. downgrade competed for investor attention with sovereign-debt headlines in Europe. European stocks erased early gains as the European Central Bank's pledge to buy sovereign bonds failed to restore investor confidence for long, with the Stoxx Europe 600 hitting a 15-month low.
Asian bourses were pummeled, with China's Shanghai Composite dropping nearly 4% to a 13-month low. The Group of 20 leading industrialized and developing nations statement that they were prepared to act in coordination to stabilize markets also failed to stem the selling tide.
Crude-oil futures slid near $84 a barrel amid worries about the economy.
The U.S. dollar fell against yen, but moved higher against the euro.
The economic calendar was bare Monday, but investors will look forward to the Federal Reserve's monetary policy statement on Tuesday for an indication of how worried policy makers are about the market's tumble and the slowing economy.
In corporate news, shares of blue chip telecommunications company Verizon Communications shed 2.3% after about 45,000 workers went out on strike over the weekend due to a contract dispute.
McDonald's shed 1.4% despite posting a 5.1% gain in same-store sales for July that reflected growth in all regions.
Berkshire Hathaway fell 1% after Warren Buffett's company reported second-quarter operating earnings declined from last year, as the company insurance operations suffered a loss.