Why Markets Are Spooked Today
Debt worries across Europe and the U.S. have triggered a broad sell-off on global markets today, gaining momentum well into the afternoon. At it lowest point, the Dow Jones industrial average sunk 300 points, while the S&P 500 suffered its longest drop since September. To political observers, the cause of the sell-off seemed almost too obvious as it coincided with the Super Committee's failure to reach an agreement. "How can super committee failure hurt markets? What idiots made investment decisions betting on super committee succeeding?" said The Washington Examiner's Philip Klein, in a widely-retweeted remark. According to market analysts, the committee's failure to tackle U.S. debt is one of many factors spooking investors. Here's what they're saying:
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It's not just the Super Committee Rick Bensignor, chief market strategist at Merlin Securities, told Reuters the combined effect of debt woes in Europe and political gridlock in the U.S. was enough to intimidate investors. "People are just wary to commit heavily to the market if you've got a particular day that no particular good news came out over the weekend anywhere -- there is virtually no good news and several data points were negative."
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Yes it is In a note dated November 18, Goldman Sachs strategist David Kostin said the Super Committee breakdown would demonstrate “the inability of elected officials to act in the long-term best interests of all Americans.” Predicting a broad sell-off, the note reported by Bloomberg, predicted that a breakdown in negotations would bring the S&P 500 down 9.5 percent from the previous week.
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It's the fear of a second downgrade CNN Money reports that "Investors are growing increasingly concerned that Congress's failure to act could cause Moody's and Fitch to consider downgrading U.S. debt, following S&P's decision in August to take away its AAA rating." Scott Clemons, chief investment strategist at Brown Brothers Harriman, tells CNN "There's a real risk of further downgrades now. Moody's and Fitch could take this as an opportunity to say that S&P got this right."
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It's a vote of no confidence in Western governments Mohamed A. El-Erian, CEO at Pacific Investment Management, told Bloomberg it's all about the perception of government efficacy. “The global selloff in risk assets reflects concerns about the inability of policy makers to catch up with unsettling economic and financial realities, particularly in Europe and America." he said. "The selloff is amplified by growing strains in the underlying functioning of markets.” Additionally, David Kostin, a strategist at Goldman Sachs
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Europe is playing a major role in the fear The Washington Post focuses on debt woes in Spain. "In Europe, investor attention pivoted to Spain after weeks of focusing on Greece and Italy. Spain’s ruling socialist party lost big in parliamentary elections over the weekend, which is set to sweep prime minister Jose Luis Rodriguez Zapatero from office. The new governing center-right Popular Party, led by Mariano Rajoy, will now face the arduous task of enacting budget cuts and other reforms." The paper adds that Spain's cost of borrowing money rose by .17 points today to 6.48 percent.
