- Title: USA: US investors flee stocks for bonds on US downgrade
- Date: 9th August 2011
- Summary: NEW YORK CITY, NEW YORK, UNITED STATES (AUGUST 08, 2011) (ORIGINALLY 4:3) (REUTERS) (SOUNDBITE) (ENGLISH) MICHAEL PURVES, CHIEF MARKET STRATEGIST, BGC PARTNERS, SAYING: "The total message from what the market is saying is that we've never dealt with a U.S. sovereign downgrade before. No investor anywhere has seen that happen so there's a lot of confusion about what this really means. And I think it will take some time to parse through what the real implications are. Clearly the financial sector - there's going to be some very interesting implications for the financial sector. And there is a view that you can't have a real rally in the broader equity indices without the financials doing well. So we'll have to see how that plays but I think that's the one thing that's going to be very very important to be following -- is how the big banks are processing this downgrade."
- Embargoed: 24th August 2011 13:00
- Location: Usa, Usa
- Country: USA
- Topics: Economy
- Reuters ID: LVAD6I6RKFL64DG7ZRCJ6GZ0SIOX
- Story Text: U.S. stocks plunged on Monday (August 8), racking up their biggest losses in almost three years as investors fled to the safety of gold and bonds after the downgrade of the U.S. credit rating by Standard & Poor's stoked fears the country is falling back into recession.
Wall Street ended down more than 6 percent. A favored gauge of investor anxiety spiked in a sign investors are afraid of more declines to come. The CBOE Volatility Index surged 50 percent to 48. The selling came in heavy trading, with volume of 17.5 billion shares on the New York Stock Exchange, NYSE Amex and Nasdaq, second only to the day after last year's sudden "flash crash."
Investors took shelter in the asset that was downgraded -- choosing U.S. government bonds for their liquidity and perceived high quality. They struggled to discern the effects of the U.S. credit rating downgrade to AA-plus from AAA, which could hit various components of the vast U.S. financial sector, from mortgage lenders to municipal issuers and insurers.
According to Michael Purves, Chief Market Strategist, BGC Partners, market volatility on Monday was driven by sheer confusion.
"The total message from what the market is saying is that we've never dealt with a U.S. sovereign downgrade before. No investor anywhere has seen that happen so there's a lot of confusion about what this really means. And I think it will take some time to parse through what the real implications are," said Purves.
"There is a view that you can't have a real rally in the broader equity indices without the financials doing well. So we'll have to see how that plays but I think that's the one thing that's going to be very very important to be following -- is how the big banks are processing this downgrade," he added.
The Dow Jones industrial average dropped 634.76 points, or 5.55 percent, to 10,809.85. The Standard & Poor's 500 Index slumped 79.92 points, or 6.66 percent, to 1,119.46. The Nasdaq Composite Index skidded 174.72 points, or 6.90 percent, to 2,357.69.
Defining the environment as a range-bound "wolf market", Purves predicted that the markets were very close to the bottom and that bottom fishing would soon follow.
The downgrade -- and threats of subsequent moves by S&P or other rating agencies -- raises uncertainty about the credibility of the United States in the global economy as investors worry about another recession.
Central to S&P's argument was that political paralysis in Washington has reached a point where the government would be unable to deal with worsening deficits and sagging economic growth. This burdens a stock market already skittish after last week's outbreak of fear.
Monday's rush for the exits extinguished any relief from earlier news the European Central Bank was buying Italian and Spanish government bonds in the latest move to staunch the euro zone debt crisis.
It was the biggest drop for the S&P since December 2008. Investors looking for a place to park their money pushed into gold, U.S. Treasuries and some safe-haven currencies. Gold ran up to a record high above $1,700 an ounce. Benchmark 10-year notes at one point soared over two points in price, with yields falling as low as 2.33 percent, the lowest level since February 2009.
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