Global markets fall on worries about U.S. credit downgrade

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Global stock markets sank again Monday as worries about the downgrade of U.S. debt outweighed relief at a European Central Bank pledge to buy up Italian and Spanish bonds to help the two countries avoid devastating defaults.

European markets lost early momentum and most were trading sharply lower amid mounting fears over the opening of U.S. markets, when traders will have their first chance to respond to Standard & Poor’s decision to lower its triple A rating for the U.S.

Concerns of a global recession trumped any relief European markets got from the sharp fall in Italian and Spanish bond yields after the European Central Bank said it would buy the two countries’ bonds in order to help them avoid devastating defaults.

The yield on Italy’s ten-year bonds fell 0.66 percentage point to 5.32 per cent while Spain’s tumbled 0.82 percentage point to 5.22 per cent.

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

Sentiment in Europe has not been helped at all by the expected sell-off at the U.S. open. Dow futures were down 2.1 per cent at 11,167 while the broader Standard & Poor’s 500 futures fell 2.4 per cent to 1,168.

Policymakers around the world, many on holiday, 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.

Late Sunday, Europe’s central bank said it would “actively implement” its bond-buying program to calm investor concerns that Italy and Spain won’t be able to pay their debts. Last week, worries over the two countries’ ability to keep tapping bond markets contributed to the turmoil in global markets, which saw around $1.5 trillion wiped off share prices.

Seeking to avert panic spreading across financial markets, 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.

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.

Earlier in Asia, the repercussions of S&P’s downgrade weighed on stock markets.

Among the major markets, Japan’s Nikkei 225 stock average closed down 2.2 per cent 9,097.56, while Hong Kong’s Hang Seng fell the same rate to 20,490.50. South Korea’s Kospi ended 3.8 per cent lower as did China’s main exchange in Shanghai.

In the currency markets, the euro was flat at $1.4308 while the dollar was down 0.8 per cent at 77.69 yen.

Fears over the global economy are having a major impact on oil markets, with the main New York rate down another $2.87 to $84.01 a barrel.

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