June 19, 2024

Wall St. Slides on Pessimism About Deficit Deal

A bipartisan panel in Washington was expected to announce that its divisions were too great to settle on a plan to cut $1.2 trillion from government spending over 10 years, setting the stage for the “automatic” implementation of spending cuts in 2013.

“Fitch has warned that it will downgrade Uncle Sam’s AAA-rating if there is no agreement,” Holger Schmieding, an economist with Berenberg Bank in London, wrote in a note. “This sounds eerily familiar to the turmoil in late July and early August (U.S. debt ceiling debate, S.P. downgrade), just ahead of the big drop in European equity prices in August.”

The Standard Poor’s 500-stock index, a broad measure of the market, fell 2.6 percent to 1,184.13 in morning trading. The Dow Jones industrial average was off 2.9 percent, or 338 points, and the Nasdaq composite index lost 2.7 percent.

“The market has been spooked over Europe and they are still not convinced that Europe is going to be able to pull out of this,” said Peter Cardillo, chief market economist for Rockwell Global Capital. “This is all weighing on the market.”

French and euro zone markets also fell as Moody’s highlighted the peril to France’s finances.

In afternoon trading, the Euro Stoxx 50 index, a barometer of blue chips, fell 2.6 percent, while the FTSE 100 index in London fell 2.1 percent. The CAC 40 in France and the Germany DAX were each down by 2.7 percent.

Moody’s warned in October that it might begin a review of France’s AAA rating, which is considered the most fragile of the top-rated European governments, if growing bailout costs threatened to overstretch its finances.

Losing its gilded status as a AAA-rated borrower would mean France’s borrowing costs would rise and would weigh on credit rating of the euro zone bailout fund, the European Financial Stability Facility. Standard Poor’s had already put a scare into French officials this month, erroneously sending an e-mail on Nov. 10 suggesting that it had lowered the rating on France’s sovereign debt.

“Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications,” Alexander Kockerbeck, a Moody’s analyst, wrote in a weekly report, noting that weak economic growth would further weigh on the country’s efforts to control its spending.

The growing risk of a European recession also weighed on markets. The Bundesbank, the German central bank, on Monday revised down its 2012 growth forecast to 0.5 percent to 1 percent, down from the 1.8 percent growth in gross domestic product it had forecast in June. The European Commission this month cut its growth forecast for the 17 euro zone nations to 0.5 percent in 2012.

In the bond market, the yield on United States 10-year Treasury securities fell 6 basis points to 1.95 percent, while comparable German sovereign debt yielded 1.87 percent, down 9 basis points. A basis point is one-hundredth of a percent.

Spanish 10-year yields ticked up 21 basis points to 6.519 percent, while Italian 10-years traded to yield 6.652 percent, up 3 basis points. French 10-year bonds, a growing focus of market attention, were trading 2 basis points lower, at 3.43 percent.

The spreads between the French, Italian and Spanish yields, on the one hand, and the German yields, the European benchmark, on the other, have grown sharply this year, signaling market distrust of the bonds of euro zone members once thought to be safe.

United States crude oil futures fell 1.4 percent to $96.30 a barrel. Comex gold futures were down 1 percent at $ $1,705.5 an ounce.

The dollar rose against major European currencies. The euro slid to $1.3472 from $1.3524 late Friday in New York.

Asian shares fell. The Tokyo benchmark Nikkei 225-stock average fell 0.3 percent. The Sydney market index S.P./ASX 200 fell 0.3 percent. The Hang Seng index fell 1.4 percent Hong Kong while the composite index did the same in Shanghai.

This article has been revised to reflect the following correction:

Correction: November 21, 2011

An earlier version of this article misspelled the name of Berenberg Bank. 


Article source: http://www.nytimes.com/2011/11/22/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

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