While you were sleeping: S&P cuts US outlook

While you were sleeping: S&P cuts US outlook

(BusinessDesk) April 19 - Equities on Wall Street dropped after Standard’s & Poor’s downgraded the outlook for the U.S. to negative.

S&P’s unexpected move sent investors running for the hills. In early afternoon trading on Wall Street, the Dow Jones Industrial Average dropped 1.40%, the Standard & Poor’s 500 Index shed 1.32% and the Nasdaq Composite Index fell 1.40%.

The credit ratings agency said the move signals at least a one-in-three chance that it could eventually lower its long-term AAA rating on the U.S. within two years. A downgrade would damage the status of the U.S. as the world's most powerful economy and the greenback’s role as the dominant global currency.

"The global economy is becoming increasingly unstable yet investors in the U.S. have been either excessively optimistic at worst or at best, complacent," Bruce Bittles, chief investment strategist of Robert W. Baird & Co in Nashville, told Reuters.

The VIX, the investors’ fear index, jumped 11.6% to 17.10 today.

However, President Barack Obama’s chief economic adviser rejected S&P’s negative outlook as a “political judgement” that he said doesn’t deserve “too much weight.”

“They are saying their political judgement is that over the next two years they didn’t see a political agreement” to reduce long-term deficits, Austan Goolsbee, chairman of the Council of Economic Advisers, told Bloomberg Television’s InBusiness with Margaret Brennan. “I don’t think that the S&P’s political judgement is right.”

S&P’s comments didn’t hurt demand for U.S. Treasuries, with 30- and 10-year securities rising after declining earlier in the session. Yields on 10-year notes dropped four basis points to 3.37% at 2.04pm in New York, according to Bloomberg Bond Trader prices.

The U.S. dollar rose 0.9% against a basket of major currencies.

The euro dropped, last trading 1.4% weaker on the day at US$1.4234. It was the biggest fall since a 1.86% drop on November 23, according to Reuters, amid increasing concern Greece will have to restructure its debt.

On the U.S. earnings front, there was some positive news.

While Citigroup reporter a 32% drop in first-quarter profit today, the results were better than expected, underpinning the stock and showing the third-largest U.S. bank, which was close to collapsing in the financial crisis, has stabilised but is still struggling to generate real growth.

"We're not seeing a lot of revenues being thrown off by main businesses ... They haven't been able to turn recovery into growth," Len Blum, a managing partner of investment firm Westwood Capital, who personally owns bank stocks, told Reuters.

Oil dropped on S&P’s comments, while gold rose, climbing to a record US$1,497.20 an ounce.

"The U.S. debt situation got a reality check this morning from the move by S&P," John Kilduff, partner at Again Capital in New York, told Reuters. "Only precious metals will be seen as attractive in the aftermath of the outlook downgrade."

OPEC ministers expressed concern at a meeting in Kuwait, where Nobuo Tanaka, executive director of the International Energy Agency, reiterated his comment that if oil prices remained around current levels, they could trigger a recession similar to the one in 2008.

Saudi Arabia on Sunday confirmed it had cut output by more than 800,000 barrels per day in March because of weak demand for its crude.

Brent crude for June fell US$1.81 to US$121.64 a barrel as of 1.58pm EDT.

U.S. crude for May dropped US$2.42 to US$107.24. The U.S. May crude contract expires on Tuesday.

(BusinessDesk)

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