Downgrade sparks sell off on Wall St

THE US stock market tumbled in heavy volume yesterday as Standard & Poor’s downgraded the credit outlook of the United States, adding to worries about the global economy after China moved to curb liquidity.

Investors also focused on Greece, where financial markets are increasingly convinced the country will have to renegotiate the terms of its public debt. Greek officials denied that some form of debt rescheduling was imminent.

The Dow Jones industrial average dropped 140.24 points, or 1.14 per cent, to 12,201.59. The Standard & Poor’s 500 index lost 14.54 points, or 1.1 per cent, to 1,305.14. The Nasdaq Composite Index fell 29.27 points, or 1.06 per cent, to 2,735.38.

The S&P 500 fell below 1,300 for the first time since 24 March, and some in the market see a close below that level as a trigger of future losses. Short-term support is seen near the 1,285 area.

The CBOE Volatility Index, better known as Wall Street’s fear gauge, surged more than 17 per cent, its largest percentage jump since 16 March. It closed on Friday at its lowest since July 2007.

“The global economy is becoming increasingly unstable yet investors in the US have been either excessively optimistic at worst or at best, complacent,” said Bruce Bittles, chief investment strategist of Robert W Baird & Co.

S&P downgraded its outlook on the United States credit rating to negative, saying it believes there’s a risk US policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

The stock market’s vulnerability was demonstrated by its strong sell-off. Comparatively, the reactions of the US Treasury debt and dollar markets were more subdued.

On Friday, the S&P 500 fell for a second week as concern spread that growth expectations may have to be trimmed.

As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities, consumer staples and healthcare posted the smallest losses in yesterday’s slide.

Caterpillar, hurt both by expectations of ballooning funding costs and China’s move to harness liquidity, slid 4.2 per cent.

Among the companies reporting earnings yesterday, Halliburton, the world’s second-largest oilfield services company, gained 1.7 per cent, and drugmaker Eli Lilly fell 1.4 per cent. Citigroup rose 0.7 per cent following its results.