Uneasy Financial World Awaits Wall Street Reaction

Aug 8, 2011

Wall Street was poised Monday for a day of potential turmoil after global stocks slid in the wake of a first-ever downgrade of U.S. credit and major intervention by the European Central Bank to help stave off defaults in Spain and Italy.

European markets lost early momentum and moved sharply lower amid mounting concerns over eurozone debt woes and the pending opening of U.S. markets, when traders will have their first chance to respond to Standard and Poor's decision Friday to lower its triple A rating for the U.S.

The European Central Bank's pledge to buy bonds from Italy and Spain pushed yields on Italy's 10-year bonds down 0.66 percentage point to 5.32 percent while Spain's tumbled 0.82 percentage point to 5.22 percent.

Britain's FTSE 100 index of leading British shares was down 1.7 percent at 5,160 while France's CAC-40 fell 2 percent to 3,214. Germany's DAX was 2.3 percent lower at 6,096.

The finance ministers and central bankers of the Group of 20 industrial and developing world also issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.

"Europe at the moment is a much bigger problem than the United States," Tyler Cowen, a professor of economics at George Mason University, said.

"The debt issue (in the U.S.) ... becomes really serious 10 years from now, when health care costs are spiraling," Cowen told NPR. "In the short run, we have a manageable problem. In the longer run, we do not."

Sentiment in Europe was not helped by the expected sell-off at the U.S. open. Dow futures were down 2.1 percent at 11,167 while the broader S&P 500 futures fell 2.4 percent to 1,168.

Policymakers around the world are trying to come up with a strategy to shore up market worries over the global economy and the levels of debt in the U.S. and Europe.

Nouriel Roubini, an economist at New York University who predicted the housing market crash and recession before the vast majority of other economists, said that the credit rating agency should have waited "to see whether Democrats and Republicans reach an agreement on deficit reduction."

The downgrade, he told NPR, is going to cause a "stock market correction (and) reduce business, consumer and corporate confidence.

"Its going to increase the risk of a double dip recession if not ensure it," he warned.

Other economists think the downgrade will have little affect on interest rates.

"Global investors have little alternative but to continue to do business in dollars and store wealth in Treasuries. The bonds denominated in other reserve currencies-the yen and euro-are simply unavailable in suitable quantities," said Peter Morici, a professor at Smith School of Business at the University of Maryland.

So far, the downgrade doesn't seem to be having too much of an impact on U.S. government bonds, known as Treasuries despite worries that it would prompt investors to demand more. Instead, yields on ten-year Treasuries actually fell.

"Early market reactions suggest that the treasury market will remain well supported," Jane Foley, an analyst at Rabobank International, told The Associated Press. "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."

The Associated Press contributed to this report.

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