Fresh evidence that the US recovery is faltering, and fears over the need for possible bail-outs in Italy and Spain rocked investors’ confidence.
They overshadowed the agreement to lift the $14.3 trillion (£8.2 trillion) debt ceiling in the US and highlighted how a second bail-out for Greece had not dampened fears over an escalating sovereign debt crisis in the eurozone.
“Now that the debt ceiling deal, assuming it passes, has averted an imminent catastrophe, attention can return to the underlying state of the economy,” said Nigel Gault, the IHS Global Insight chief United States economist.
“The news there isn’t good.”
“You’re seeing a buyers’ strike,” Kenneth Polcari, managing director at ICAP Equities, told The Daily Telegraph on the floor of the New York Stock Exchange. “It’s not panic but people are very nervous about the US economy and what’s happening in Europe.”
“I suspect a lot of individual investors will be a little confused by the markets’ reaction today,” said David Joy, chief market strategist for Ameriprise Financial, the parent of the Columbia mutual funds in Boston.
“We got an initial relief rally, but it quick dissipated. Despite a deal in Washington, the cold hard reality is there are a lot of questions about the fundamental strength of our economy.”
The Dow Jones industrial average was down 98.61 points, or 0.81 per cent, at 12,033.88. The Standard & Poor’s 500 Index was down 13.48 points, or 1.05 per cent, at 1,273.46. The Nasdaq Composite Index was down 22.50 points, or 0.82 per cent, at 2,722.11.
In addition to the weak manufacturing data, investors also remained on edge today over concerns that Congress might reject the deal — neither the House nor the Senate are expected to vote on the deal before the markets close today.
What is more, many financial analysts warned that the United States still remains in jeopardy of losing its prized AAA credit rating from one of the major credit rating agencies in spite of the deal.
“I think we’re going to be watching for the reactions of the rating agencies,” said G. David MacEwen, chief investment officer at mutual-fund company American Century Investments in Kansas City, Mo.
Pointing to the stance of Standard and Poor’s that suggested it may downgrade the country to a AA rating from a AAA if spending was not reduced by about $4 trillion, Mr. MacEwen said it was a “big question” whether it and the other rating agencies will be satisfied with this deal.
In Europe, Spanish prime minister José Luis Rodríguez Zapatero cancelled his summer holiday and Rome called an emergency meeting, triggering fresh alarm on bond markets.
Yields on Italy’s benchmark 10-year bond hit their highest level since 1999’s launch of the euro, closing at 6.11pc after touching 6.22pc. The equivalent Spanish bond reached a near record peak of 6.43pc, before ending a febrile day’s trading at 6.25pc.
Spanish and Italian bond yields inched closer to the 7pc level that forced the emergency rescues of Greece, Ireland and Portugal. The premiums Madrid and Rome have to pay to borrow compared with Germany also hit record highs.
All major stock exchanges in Europe fell, with the FTSE 100 closing down 0.97pc at 5,718.39, Germany’s DAX slipping 2.26pc and the CAC 40 in Paris dropping 1.82pc.
Italy’s stock market fell 2.5pc after economy minister Giulio Tremonti called a meeting of the country’s financial stability committee. Italy’s debt to GDP ratio of 120pc is the worst of any euro nation after Greece’s 160pc. “The fear of the market is that the world is going into recession again,” said Alessandro Giansanti, an ING bank strategist.
“Foreigners, in particular, are going to look at this deal and say, ‘I thought the U.S. was capable of more than this,’ ” said Zane Brown, the fixed-income strategist at Lord Abbett. “We may find that foreign owners of U.S. Treasury securities may look for opportunities to move elsewhere.” [via The Telegraph and The New York Times]