Tuesday, 9 August 2011

Wall Street shares plunge as Dow sinks below 11,000

US stocks tumbled today in a rout that sent the Dow Jones Industrial Average plunging to the sixth biggest point drop in its history, reflecting a toxic brew of investor fears over government debt and the chances that the economy will slide into another recession.

The Dow Jones Industrial Average sank 634.76 points, or 5.55 per cent, to 10,809.85, falling beneath 11,000 for the first time since November and adding to last week's steep losses. The blue-chip measure ended exactly on session lows in the biggest single-day point and percentage loss since December 1, 2008.

In response the Australian share price index futures contract tumbled 157 points, suggesting the benchmark S&P/ASX 200 index could fall nearly 4 per cent in early trading.

The Australian dollar was also under pressure, falling below $US1.02 cents. At 6.20am AEST, the Australian dollar was trading at $US1.0196, down from $US1.0355 at the close of Sydney trading yesterday.

Most-active December gold futures soared to a record settlement of $US1713.20, up $US61.40. US Treasuries were a winner despite the credit downgrade, with the yield on the 10-year note falling to the lowest levels since January 2009.

"Everybody is looking for whatever they perceive as a safe haven, even if it's just plain illogical," said David Kelly, chief market strategist for JP Morgan Funds.

"Things are pretty dismal right now."

Major stock indices cascaded lower throughout much of the session, as S&P downgraded clearing bodies, entities such as Fannie Mae and Freddie Mac and lowered outlooks for companies including Warren Buffett's Berkshire Hathaway following S&P's downgrade of US credit to double-A-plus from triple-A late on Friday.

The S&P 500 index tumbled 79.92 points, or 6.66 per cent, to 1119.46, the 10th decline in 11 sessions. Financial components fell 10 per cent while S&P 500 energy stocks slumped 8.3 per cent. Not a single component of the 500 stocks that make up the broad index finished in positive territory. The Nasdaq Composite slumped 174.72 points, or 6.9 per cent, to 2357.69.

The Russell 2000 index of small-capitalisation stocks fell the most in a single session in its history, plummeting 63.67 points, or 8.91 per cent, to 650.96. Small caps tend to make more exaggerated moves and are generally viewed as riskier than the widely held shares of large companies.

The fact that today's swoon came right on the heels of the Dow's biggest weekly point loss since the financial crisis in 2008 set up many market participants for forced sales and margin calls, traders said.

That made some of the losses self-perpetuating. It also raised the prospect of capitulation, the point when losses snowball and sentiment craters, helping markets find a bottom.
"There is a lot of forced liquidation," said Lorenzo Di Mattia, manager of Sibilla Global Fund, and such actions "might last another day perhaps".

In one early sign that the session’s action would be volatile, 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 stockmarket.

Bank of America plunged $US1.66, or 20 per cent, to 6.51, to lead blue-chip decliners, stung by both a steep sell-off in financial stocks and by word that American International Group is suing the company, along with a host of other prominent financial institutions, as it seeks to recover losses on mortgage-backed securities. AIG's stock fell 10 per cent to $US22.58.

Gold miners and precious-metals exchange-traded funds bucked the broader trend as they followed the precious metal higher. AngloGold Ashanti rose 0.5 per cent to $US42.01 and SPDR Gold Trust gained 3.3 per cent to $US167.12. Newmont Mining gained early but ended down US28 cents, or 0.5 per cent, at $US54.13.

President Barack Obama did little to assuage investor fears today as he said that the S&P downgrade should provide a "renewed sense of urgency" to tackle the deficit.

Indices hit fresh lows while the president spoke, and again afterward.

Worries about the strength of the global economy loomed just as large, if not larger, than credit matters for many investors. Fears of a slowdown have reverberated in recent weeks.

"The market is probably more concerned with the economic risk than with the S&P credit rating," said Bernie McDevitt, vice president of institutional trading at Cheevers & Co.

Berkshire Hathaway's B-class shares fell $US4.60, or 6.5 per cent, to $US66.65, after Warren Buffett's company reported second-quarter operating earnings declined from last year, as the company's insurance operations suffered a loss.

Morgan Stanley plunged $US2.90, or 14 per cent, to $US17.12. The company warned in a regulatory filing today that the downgrade on the sovereign credit rating of the US could have a "material adverse" impact on financial markets and its own business.

In bond markets, US Treasury bonds proved today that they're still the go-to safe-haven for many investors at time of stress, even though the US's rating was cut by S&P for the first time in history last week.

Rather than sparking a sell-off in Treasuries, S&P's action -- cutting the US's triple-A rating one notch to double-A-plus -- added to fears about the global economic outlook.

The ferocious buying sent Treasury yields, which move inversely to their prices, tumbling to fresh landmark lows. The two-year note's yield fell to a fresh record low of 0.228 per cent while the benchmark 10-year note's yield dipped to as low as 2.309 per cent, the weakest level since January 2009.

The yield has nosedived from this year's peak of 3.77 per cent in February and is now trading near the record low of 2.034 per cent hit in mid December 2008 after Lehman Brothers's collapse.

"It is not about yields," said Thomas Roth, executive director in the US government bond trading group at Mitsubishi UFJ Securities (USA) in New York.

"People are buying Treasuries because they are afraid to be in anything risky. They will take Treasuries at whatever yield they can get."

In late New York trade, the 10-year note was 2 4/32 higher in price to yield 2.318 per cent.

The 30-year bond was 3 6/32 higher to yield 3.657 per cent, and the two-year note was 2/32 higher to yield 0.264 per cent.

The price move underlines the major dilemma confronting investors: There are few alternative safe-haven assets out there that can match the depth and liquidity of the Treasury market, which has more than $US9.3 trillion in debt outstanding.

"Double-A-plus is the de facto triple A," said James Paulsen, chief investment strategist at Wells Capital Management, which manages $US342 billion.

"There is a lot of fear in the markets right now and Treasuries are still the place to go."

That said, Brian Edmonds, head of interest rates at Cantor Fitzgerald in New York, calls the downgrade a "big warning" to US policymakers.

He said that policymakers need to put out a credible deficit-cutting plan in response to S&P's warning that it may cut the US's rating again within the next two years.

The next focus for investors is tomorrow's monetary policy meeting by the Federal Reserve -- the current gloomy economic outlook has some market participants thinking the central bank needs to provide further stimulus even though its options are running thin.

The central bank has aggressively expanded its balance sheet since the 2008 financial crisis and it just completed a $US600bn Treasury bond-buying program in June.

One way the Fed can provide stimulus is to signal that its key policy rate will stay where it is longer than many investors currently expect. Interest rate futures traders currently expect the first rate hike to be in the first half of 2013.

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