Markets suffered their biggest fall of the month as Standard & Poor downgraded long-term US sovereign debt rating to “negative” based on the country’s incremental budget deficit. European sovereign debt worries and China’s move to increase bank’s reserve ratio requirements added to the gloom.
 
The Dow Jones Industrial Average (DJIA) slipped 1.14% to 12,201.59. During the day, the Standard & Poor’s 500 Index had plunged below 1,300 for the first time since March 24 but rebounded to close at 1,305.14, shedding 1.10%. The Nasdaq Composite Index dropped 1.06% to close at 2,735.38. The fear-gauge CBOE Volatility Index (VIX) increased 10.7% and posted its highest daily percentage increase since February 22, 2011. Volumes remained low and were at 7.83 billion shares on the York Stock Exchange, the American Stock Exchange and Nasdaq as against last year's daily average of 8.47 billion. On the NYSE, for every five stocks that declined, only one managed to advance.
 
At 9 a.m. in New York, before the markets opened, rating agency Standard & Poor’s cited concerns over the US budget deficit compared to its ‘AAA’ peers and downgraded the U.S. sovereign debt rating from stable to “negative”. This development weighed heavily on the markets and none of the indices were able to rebound from the lows even with the release of several earnings reports. S&P is concerned that policy makers might not be able to reach a budgetary restriction by 2013 and suggested that the nation in on far worse ground than other AAA rated nations. This downgrade has caused more jitters as the rating agency had not downgraded the credit rating of US even during the economic turmoil of 2008. S&P did not alter the ‘AAA’ long-term or the ‘A-1+’ short-term credit ratings. The effects of the downgrade will not be restricted to the equity markets of the US but will likely cause ripples across the global economy. S&P warned: "We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013," and added: "If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer AAA sovereigns."
 
Meanwhile, financial markets were weighed down by concerns over the European sovereign debt crisis while Spain paid substantially more to issue 12 and 18 month Treasury bills while investors shrugged off reassurances by European officials that Greece will not be required to remodel its debt. Subsequently, Athens two-year note yield plunged towards 20%. Yields on Greece’s 2.5 year-bond surged 18% while yield on Spain’s 10 year bonds gained 5.5%. After a strong showing of True Finns party of Finland on Sunday, elections will likely derail the approval of the bailout package to Portugal as the party was earlier opposed to the European Union’s bailout decisions.
 
In other news, the People’s Bank of China raised its reserve ratio requirements in a bid to fight inflation. This is the fourth time the Chinese bank has taken such a step this year. The statistics bureau, last Friday, had reported that the gross domestic product has surged 9.7% in the first quarter on a yearly basis while inflation has escalated to its highest level since July 2008, at 5.4%. The central bank raised the commercial banks’ reserves with the central bank by 50 basis points or to 20.5% with effect from 21st April.
 
The downgrade of the US sovereign debt rating also pulled down crude prices as investors anticipate a drop in oil demand. Light, sweet crude for May delivery dropped 2.3% to $107.12 per barrel on the New York Mercantile Exchange. Separately, Saudi Arabia reported a drop in oil production in March due to softer demand. However, Saudi Arabia’s oil minister, Ali al-Naimi, expected a slightly higher oil output in April compared to March levels. The energy sector led the decliners in the S&P 500 index with a 1.5% drop. Shares like ConocoPhillips (NYSE:COP), Exxon Mobil Corporation (NYSE:XOM), Chevron Corp. (NYSE:CVX), Occidental Petroleum Corporation, Valero Energy Corp., Chesapeake Energy Corporation (NYSE:CHK) and Schlumberger Limited (NYSE:SLB) shed 1.9%, 1.4%, 1.6%, 1.7%, 1.7%, 2.3% and 2.2%, respectively.
 
Boeing Co. (NYSE:BA) was the only gainer among the Dow components and edged up 0.3%. The laggards included Alcoa, Inc. (NYSE:AA), Caterpillar Inc. (NYSE:CAT) and Bank of America Corporation (NYSE:BAC) and they dropped 2.4%, 3.1% and 3.1%, respectively.
 
Coming to the earnings season, significant companies scheduled to report earnings today include The Goldman Sachs Group, Inc. (NYSE:GS), International Business Machines Corp. (NYSE:IBM), Intel Corporation (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), Linear Technology Corp. (NASDAQ:LLTC), U.S. Bancorp (NYSE:USB) and Yahoo! Inc. (NASDAQ:YHOO).
 

 
ALCOA INC (AA): Free Stock Analysis Report
 
BOEING CO (BA): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
CATERPILLAR INC (CAT): Free Stock Analysis Report
 
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
 
CONOCOPHILLIPS (COP): Free Stock Analysis Report
 
CHEVRON CORP (CVX): Free Stock Analysis Report
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
INTL BUS MACH (IBM): Free Stock Analysis Report
 
INTEL CORP (INTC): Free Stock Analysis Report
 
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
LINEAR TEC CORP (LLTC): Free Stock Analysis Report
 
SCHLUMBERGER LT (SLB): Free Stock Analysis Report
 
US BANCORP (USB): Free Stock Analysis Report
 
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
 
YAHOO! INC (YHOO): Free Stock Analysis Report
 
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