Stocks Fall as Spain Downgraded
The U.S. stock market fell apart late in the day on Wednesday after the major averages spent much of the session near the unchanged mark.
Investors continue to sell risk assets as fears ramp up over rising Spanish bond yields, signalling that the European sovereign debt crisis may be spinning out of control. According to the International Monetary Fund (IMF), Spain had the 12th largest economy in the world in 2011 in terms of nominal GDP, and the country is the fourth largest in the eurozone.
Spain is in a deep recession with unemployment rising above 24%. As investors continue to shun Spanish sovereign debt, it is becoming increasingly difficult for the government to fund itself through normal mechanisms. Despite news earlier this week of a bailout for Spanish banks, the markets continue to view the long-term situation as unsustainable.
Furthermore, credit ratings agency Egan Jones downgraded Spanish sovereign debt on Wednesday afternoon from B to CCC+ with a negative outlook. The news was hardly a surprise. On Monday, Sean Egan of Egan Jones told Benzinga that more Spanish downgrades were likely. The firm cited the country's high funding costs, government deficits, declining GDP, high unemployment, high debt to GDP level, and losses in the banking system for the downgrade.
After the market close on Wednesday, Moody's piled on the bandwagon, lowering Spain's sovereign credit rating by three notches to Baa3 from A3 and placing it on review for possible further downgrade. Moody's cited Spain's rapidly rising debt burden, limited access to bond markets, and an anemic outlook for the Spanish economy.
The fears over Spain, and to a lesser extent, Italy, triggered more risk aversion in the financial markets on Wednesday. The Dow Jones Industrial Average closed down a little more than 77 points after trading down more than triple digits earlier. The S&P 500 fell roughly 9 points, while the tech-heavy Nasdaq recorded a loss of 24 points, or 0.86%.
The stock market losses came despite a stronger euro, which has frequently been supportive of risk assets. The EUR/USD rose around 0.71% on the day to $1.2589, but the move was little consolation for stock investors. Crude oil was volatile throughout the day and was last trading lower in the electronic session at $82.56.
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