Markets Tumble on European Downgrade Reports

Wall Street endured a sharp sell-off Friday morning as financial markets tumbled amid unconfirmed reports that Standard & Poor’s will downgrade a number of European nations later today.

U.S. equity markets were set to open modestly lower this morning, but later extended their losses amid reports that one of the world’s leading rating agencies plans to lower the credit ratings of France and many other countries following the close of U.S. markets on Friday.  For France, such a measure would mark the end of 17 consecutive years being AAA-rated.

According to Reuters, Germany will not be one of the nations downgraded, which cited euro zone sources who spoke on conditions of anonymity.

The Dow Jones Industrial Average (DJIA) dropped 136.83 points, or 1.1%, to 12,334.19 – one day after reaching its highest level since July 26, 2011.  The markets’ slide coincided with a substantial rise in investor risk aversion, as evidenced by the 8.6% climb in the CBOE Volatility Index (VIX) to 22.23.

In currencies, the euro fell to a fresh 16-month low of 1.2626 against the U.S. dollar as traders moved into the relative safety of the world’s reserve currency.  The stronger dollar put pressure on commodities, as gold slid 1.0% to $1,631.10 per ounce and copper retreated 1.5% to $3.59 per pound.

S&P declined to comment on the speculation, as expected, but the fact that it did not refute the report suggests that the downgrades may in fact occur later today.  Furthermore, it has become common practice for many companies, governments, and rating agencies to release bad news on Friday evenings in a rather cowardly attempt to mitigate the impact on financial markets.  For example, the FDIC in the U.S. is notorious for announcing bank closings on Friday nights since most people are beginning their weekends and not as concerned with work-related news at this time. Fortunately, the markets are generally able to see past these type of shady practices.