The markets are trying to digest a lot, this morning: First, is the news from Friday that Standard & Poor's downgraded the United States' credit rating. Second, is that this morning the European Central Bank started buying Italian and Spanish government bonds.
The reason that's important is because lending costs to the two countries were quickly becoming unsustainable and that had led to worries that the two were headed the way of Portugal, Greece and Ireland. The ECB's actions essentially make sure Italy and Spain stay afloat, or as an analyst told Bloomberg this morning, make sure they now have an "official buyer" that replaces an "eroding buyer base" in the market.
But a small sigh of relief on the European sovereign debt front hasn't been enough to keep the markets from tumbling on fears of the broader and longer-term health of the global market.
We will watch for developments as the day goes on.
Update at 1:47 p.m. ET. Dow Falls 400 Points:
At one point a few minutes ago, the Dow Jones was down close to 420 points. That's 3.66 percent. Nasdaq is down 4.64 percent and S&P is down 4.59 percent.
Update at 12:57 p.m. ET. Treasury Bonds Rally:
The price move underlines the dilemma confronting investors varying from the Chinese central bank to pension funds—there are few alternative safe-haven assets out there that can match the depth and liquidity of the Treasury market, with over $9.3 trillion in debt outstanding.
Update at 11:01 a.m. ET. 'A Top 20 Event'
The Wall Street Journal, which live blogging the markets today, puts the sell-off over the past week or so into broader perspective:
Dan Greenhaus, chief global strategist at BTIG, offers some context for the market gloom: "The S&P is now down about 14% over the last eleven sessions, making this decline a top 20 event. The rapidity of the decline and its force now rivals almost anything we've seen in the post war era."
Update at 10:37 a.m. ET. Downgrades Trickle Down:
From the AP:
Officials at Standard & Poor's are downgrading the credit ratings of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.
The agency says it has also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.
Update at 9:46 a.m. ET. At Opening, U.S. Markets Tumble:
The U.S. markets opened sharply down in reaction to the S&P's downgrade of the United States credit rating. At this moment, the dow is down 222 points (1.88 percent); the S&P is down 25 points (2.16 percent).
Our Original Post Continues:
The FTSE All-World index is down 0.9 per cent after Asia slumped 2.5 per cent. The FTSE Eurofirst 300, which at one point turned positive on a rally from banks as sentiment in eurozone "peripheral" debt markets improve, has relapsed and is down 1.6 per cent.
Electronically traded S&P 500 futures have been volatile but now show Wall Street opening with a drop of about 2 per cent, which would take the benchmark's losses over the past 11 sessions to 13 per cent and leave it at a fresh nine-month trough.
Another thing to watch today is the bond market. Though, as the AP reports, U.S. Treasuries seem to remain stable:
So far, the S&P downgrade doesn't seem to be having too much of an impact on U.S. government bonds, known as Treasuries. The worry has been that the downgrade would prompt investors to demand more, but the yield on ten-year Treasuries has actually fallen.
"Early market reactions suggest that the treasury market will remain well supported," said Jane Foley, an analyst at Rabobank International. "Even though there may be no sharp sell-off in treasuries this week, S&P's decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely."
We will watch for developments as the day goes on and we'll certainly update once the U.S. markets open. As we wrote on Friday, there's no way to know how the markets will react. What seems certain is that today will be a day of volatility.