Asian stocks dropped, extending the worst global slump since the bull market began in 2009, while U.S. equity futures and oil slid after America lost its AAA 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 3.3 percent at 1:38 p.m. in Tokyo. Standard & Poor’s 500 Index futures lost 2.5 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. Oil sank 3.6 percent in New York, while gold topped $1,700 an ounce. Treasuries rallied, with the 10-year yield decreasing six basis points.
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+. 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. The European Central Bank signaled it’s ready to start buying Italian and Spanish bonds to stem the region’s debt contagion.
“Investors should be cautiously positioned,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport 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.”
Avoid Risk
On the first trading day after the S&P downgrade, investors retreated from riskier assets and poured money into Treasuries, gold, and the Swiss franc.
“The S&P rating change is a signal to a lot of investors, a wakeup call about the level of risk there is in the world,” said Peter Fisher, head of fixed income at BlackRock Inc., the New York-based money manager that oversees $3.66 trillion. Investors are “not selling Treasuries. They’re buying them. They’re selling equities. It doesn’t change anything about the level of risk in U.S. Treasuries,” he said on Bloomberg Television.
About 45 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 0.6 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 2.1 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 2.3 percent, South Korea’s Kospi Index dropped 5.1 percent and Hong Kong’s Hang Seng Index tumbled 4 percent.
Rising Uncertainty
Asian stocks will suffer because “the U.S. downgrade is clearly a negative both for sentiment and for the economic recovery,” said New York-based Dimitre Genov, a senior portfolio manager at Artio Global Management LLC., which oversees about $45.5 billion. “It adds to the rising uncertainty prevalent in the markets, increases risk premiums and lowers confidence in the U.S. policy makers that they can resolve the country’s long-standing structural problems.”
The Shanghai Composite Index sank as much as 4.9 percent to 2,497.92. A close at that level will take the Chinese gauge’s loss from its November high to more than 20 percent, the level that some investors consider to mark a so-called bear market. Brazil’s Bovespa last week also entered a bear market, while benchmark indexes for India and Russia have dropped 18 percent and 15 percent from their respective highs.
The MSCI BRIC (MXBRIC) Index of shares in the four developing nations has slumped 14 percent this year, compared with a loss of 12 percent for the MSCI Emerging Markets Index and a 7 percent retreat in the MSCI World Index of developed equities.
U.S. Shares
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 267 points, or 2.3 percent, to 11,135 and Nasdaq-100 Index futures lost 2.4 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.
Greenspan on Stocks
“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 financiers Fannie 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.
“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.”
Buffett on Economy
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 on Bloomberg Television.
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.
Treasury 10-year yields dropped to 2.50 percent today. JPMorgan Chase & Co. said a drop in Treasuries from the rating cut is unlikely to be “sustained.” Barclays Plc said the downgrade shouldn’t be “significant,” and UBS AG said the top ranking for U.S. short-term debt will prevent money funds from being forced to react. The two-year Treasury note yield was at 0.26 percent, down three basis points, while the rate on 30-year notes was three basis points lower at 3.82 percent.
‘Very Nervous’
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 0.3 percent today, as the U.S. currency retreated 0.5 percent to 78.01 yen and fell 0.2 percent to $1.4314 against the euro. G-7 members will inject liquidity as needed and act against disorderly currency moves if necessary, Japanese Finance Minister Yoshihiko Noda said.
Yuan, Won
China’s yuan rose 0.22 percent to 6.4263 per dollar in Shanghai, strengthening the most since April and touching a record high. Other higher-yielding currencies weakened, with the New Zealand dollar sliding 1.9 percent to 82.82 U.S. cents, the Australian dollar depreciating 1.2 percent to $1.0317 and the South Korean won dropped 1.1 percent to 1,078.73 per dollar.
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.
Spreading Crises
“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 $83.66 a barrel in electronic trading on the New York Mercantile Exchange today, following last week’s 9.2 percent plunge. Among base metals, copper for three-month delivery lost 0.5 percent to $8,995 a metric ton on the London Metal Exchange. Futures dropped 8 percent last week. Tin plunged 6.6 percent to $22,750 a metric ton and lead slid 2 percent to $2,313.75 a ton.
Gold for immediate-delivery rose 2.3 percent to $1,702.15 an ounce, while futures jumped as much as 3.2 percent to $1,704.90. Cash silver surged 3.7 percent to $39.7575 an ounce.
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net
