* Italian, Spanish bond yields drop on ECB buying
(Updates prices, adds details, quote)
NEW YORK, Aug 8 (Reuters) - U.S. stocks plunged on Monday
and 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 United States is slipping into recession.
Wall Street slumped as much as 6 percent by mid-afternoon
and European stocks hit a two-year low. A favored gauge of
investor anxiety spiked well above 40, a sign investors are
afraid of more declines to come. The CBOE Volatility Index
.VIX surged 41.9 percent at 45.40.
Investors were struggling 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.
"This is all a new trading paradigm, no one has ever
experienced anything like this before. It's going to take the
market and investors a couple of days to comprehend what is
actually happening," said Dean Popplewell, chief currency
strategist at Oanda in Toronto.
"We have just seen panic liquidation -- does it have the
legs to continue is obviously the next question."
Investors took shelter in the asset that was downgraded --
choosing U.S. government bonds for their liquidity and
perceived high quality.
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.
U.S. President Barack Obama blamed the downgrade on
political gridlock in Washington and said he would offer some
recommendations on how to reduce federal deficits.
"In many ways this is not about the downgrade. I think it's
about the underlying fundamentals and issues that are embodied
in the downgrade itself," said Jonathan Golub, chief U.S.
equity strategist at UBS in New York.
MSCI's all-country world stock index .MIWD00000PUS
dropped 4.6 percent to its lowest since September 2010. The
sell-off since July 29 has wiped at least $3.4 trillion off the
value of global stocks, the equivalent of Germany's gross
domestic product.
Monday's rush for the exits extinguished any relief from
news the European Central Bank was buying Italian and Spanish
government bonds in the latest move to staunch the euro zone
debt crisis.
SEARCH FOR SAFETY
Several major brokerages have in recent days lowered their
expectations for U.S. economic growth and share appreciation
for 2011 and 2012.
Moody's repeated a warning it could downgrade the United
States before 2013 if the fiscal or economic outlook weakened
significantly. It said it saw the potential for a new deal in
Washington to cut the budget deficit before then.
Investors looking for a safe place to park their money
pushed gold XAU= to a record high above $1,700 an ounce. The
U.S. dollar dropped against the Swiss franc and yen. The euro
fell against the dollar.
The euro EUR=EBS hit a record low against the Swiss
franc, falling as low as 1.0640 Swiss francs EURCHF=EBS. It
also lost 2 percent versus the yen EURJPY=R.
The dollar JPY=EBS fell 0.6 percent to 77.62 yen and was
down 1.8 percent at 0.7538 Swiss franc CHF=EBS.
Benchmark 10-year Treasury note yields fell to their lowest
levels since February 2009. The notes rose over two points in
price, with yields US10YT=RR falling as low as 2.33 percent,
the lowest rate in two-and-a-half years.
European shares closed down 4 percent after registering
gains on the ECB action. The FTSEurofirst 300 index .FTEU3
has lost about 21 percent since a peak in mid-February, putting
it in bear market territory.
The Dow Jones industrial average .DJI dropped 504.47
points, or 4.41 percent, to 10,940.14. The Standard & Poor's
500 Index .SPX slid 67.41 points, or 5.62 percent, to
1,131.97. The Nasdaq Composite Index .IXIC sank 145.38
points, or 5.74 percent, to 2,387.03.
There have been 26 other days since 2000 when the market
has been down more than 3 percent at noon, according to Birinyi
Associates Inc. On average, 85 percent of the time the market
continues lower until the close for a further 1 percent fall.
(Additional reporting by Ashley Lau, Chuck Mikolajczak and
Edward Krudy in New York and Atul Prakash and Jeremy Gaunt in
London; Editing by Andrew Hay)
Original Story
By: REUTERS
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