US stocks dropped sharply yesterday, while Treasury bond prices actually rose in the wake of Standard & Poor’s unprecedented downgrade of the United States’s credit rating.
The Dow Jones Industrial Average plummeted 334.68 points (2.9 per cent) to 11,109.93 at 1630 GMT.
The broader S&P 500 dropped 45.64 points (3.8 per cent) to 1,153.74, while the tech-heavy Nasdaq Composite plunged 100.11 points (four per cent) to 2,432.30.
Standard & Poor’s lowered the US long-term sovereign debt rating from AAA to AA+ after markets closed on Friday, citing Washington’s inability to rein in its mounting deficits.
The sell-off accelerated yesterday morning after Standard & Poor’s extended its downgrade to mortgage giants Fannie Mae and Freddie Mac, whose bonds are guaranteed by the US government and widely held around the world.
Traders had worried that the downgrade would hit the bond markets as well, but instead US Treasury prices climbed.
The yield on the 10-year Treasury fell to 2.38 per cent from 2.56 per cent late on Friday, while 30-year bonds dropped to 3.71 per cent from 3.82 per cent. Bond prices and yields move in opposite directions.
Gold, seen as a safe-haven asset in time of financial turmoil, was trading for $1,709.68 per troy ounce on the spot market in New York, after earlier hitting a new intraday high of $1,715.75.
“Sentiment is being rattled by late-Friday’s downgrade of the US credit rating by Standard & Poor’s and potential ripple effect in the financial industry,” the Charles Schwab brokerage said in a research note.
Citigroup fell 9.6 per cent, Goldman Sachs slid 5.8 per cent and JPMorgan Chase shed 5.8 per cent.
Bank of America plunged an eye-popping 15.9 per cent after it was hit with a $10.5 billion fraud lawsuit from insurance group AIG over its practices in selling mortgage-backed securities before the 2008 financial crisis.
Basic materials and energy companies were badly hit as the global economic turmoil threatened to erode commodities prices, with aluminium giant Alcoa dropping 6.8 per cent and oil major ExxonMobil falling three per cent.
World markets, already reeling from fears of spreading eurozone debt contagion, were battered in the wake of the downgrade.
London closed 3.4 per cent lower, while Paris was down 4.7 per cent and Frankfurt slumped five per cent.
The historic decision by Standard & Poor’s to downgrade the United States’s credit rating, which S&P had set at AAA in 1941, had been widely expected but nonetheless compounded worries about the global economy.
Even before the downgrade, stock markets had plunged last week on concerns that growth in the United States was slowing and the world’s largest economy might be on the brink of a double-dip recession.
Financial markets are also on edge over concerns that Italy and Spain could fall victim to the eurozone debt crisis, which has already snared Greece, Ireland and Portugal.
With anxiety high that eurozone and US debt could plunge the world into a new financial crisis, the European Central Bank signalled late on Sunday that it would make major purchases of eurozone government bonds, which market sources indicated on Monday had included Italy and Spain.