Stocks poised to tumble after S&P downgrade

August 8, 2011: 8:42 AM ET
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NEW YORK (CNNMoney) -- U.S. stocks were set to tumble at the open Monday, tracking deep declines in global markets, as investors get their first opportunity to react to Standard & Poor's downgrade of U.S. debt.

S&P 500 (SPX) and Nasdaq (COMP) futures were all down more than 2% ahead of the opening bell. Dow Jones industrial average (INDU) futures were less than 2% lower. Stock futures indicate the possible direction of the markets when they open at 9:30 a.m. ET.

Late Friday, S&P downgraded United States' credit rating by one notch to AA+, removing it from the Triple A-club for the first time in history.

Economists and investment strategists largely agree that there could be an initial shock, but the downgrade itself should not impact markets too much.

S&P rating: How to get back to AAA

Still, the rating cut is unprecedented, so nobody can be certain.

Len Blum, managing partner for Westwood Capital, said the S&P downgrade of U.S. debt is the prime reason why futures are down, because traders are anticipating a sell-off after the opening bell.

However, he said that, "In reality, it should not have affected the markets," because there's no new information in the downgrade.

"The only time a rating agency should move the markets is when they discover something that nobody else has seen," he said. "All they're doing is telling us what we already know, and they're spanking the government."

S&P's move came at the end of a tumultuous week on Wall Street, with all three indexes delivering their worst performances since the darkest months of the 2008-2009 financial crisis.

Stocks plunged Thursday, with the Dow tumbling 512 points, as fear about the global economy spooked investors. Markets ended Friday on a mixed note, when the Dow had a massive trading range of 400 points.

Peter Cardillo, chief market economist for Rockwell Global Capital, said that last week's declines on the stock market might keep Monday's drop in check.

"We're certainly oversold, which means that we should be able to stabilize very shortly," he said.

European debt crisis: Investors will be weighing fresh news out of Europe Monday.

The European Central Bank signaled in a statement Sunday that it was ready to begin buying Italian and Spanish government bonds -- stepping up its efforts to slow the rising panic over the eurozone's debt crisis.

In a separate announcement, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

Though the ECB's support relieved some concerns about Europe's ongoing debt crisis and provided a brief boost to markets early Monday, the uncertainty of the aftermath of S&P's downgrade overwhelmed any investor optimism.

European stocks were sharply lower in afternoon trading. Britain's FTSE 100 (FTSE) lost 1.6%, the DAX (DAX) in Germany sank 2.2%and France's CAC 40 (CAC) dropped 1.8%.

Meanwhile, Asian markets ended deep in the red. The Shanghai Composite retreated 3.8%, the Hang Seng in Hong Kong and Japan's Nikkei each fell 2.2%.

Bonds: Despite the downgrade of U.S. debt, Treasury prices rose, pushing yields lower. The yield on the benchmark 10-year U.S. Treasury fell to 2.49% from 2.56% late Friday.

Currencies and commodities: The uncertainty surrounding S&P's downgrade sparked a flight to quality.

Gold futures for December delivery surged $49.10, or 3%, to top $1,700 an ounce. Earlier in the session, gold prices hit an all-time intraday high of $1,718.20 an ounce.

The yen and the Swiss francs -- perceived to be two of the world's safest currencies -- rose against the dollar.

The greenback, also considered a safe haven, managed to gain some ground against the euro and the British pound.

Oil for September delivery fell $4, or nearly 5%, to $82.88 a barrel.

America's Job Crisis

Economy: Moody's Investors Service explained Monday why it was sticking with its triple-A bond rating and negative outlook for the United States -- setting itself apart from Standard & Poor's, which downgraded the U.S. last week.

Moody's said it expects the economy will improve, and that additional measures to reduce the budget deficit will be in place by 2013.

Companies: Bank of America (BAC, Fortune 500) shares fell 6% in premarket trading Monday, after American International Group (AIG, Fortune 500) said it is planning to sue the bank over hundreds of mortgage-backed bonds.

Berkshire Hathaway (BRKA, Fortune 500) joined the bidding pool for reinsurer Transatlantic Holdings (TRH), with an offer Friday. Transatlantic said they were given until Monday night to decide whether to accept Berkshire's offer. Shares of Transatlatnic surged almost 13% in early trading. To top of page

Index Last Change % Change
Dow 16,880.36 -31.75 -0.19%
Nasdaq 4,462.90 20.20 0.45%
S&P 500 1,970.07 0.12 0.01%
Treasuries 2.55 0.09 3.74%
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Facebook Inc 74.68 0.97 1.31%
Pfizer Inc 29.26 -0.21 -0.71%
Apple Inc 98.15 -0.23 -0.23%
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