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Double Dip Fears Grow Stronger

11 August 2011 - News - Editor

With rumors of a possible credit rating downgrade for France, one of the few remaining AAA countries, analysts have noted that there appears to be a heightened level of anxiety among investors. This was reflected in the loss of 520 points for the Dow Jones industrial average on Wednesday, with losses also recorded for the S&P 500 index and the NASDAQ Composite which declined by 52 and 101 points respectively. Stocks were primarily dragged down by the financial sector of the market, and despite reassurances by Bank of America CEO Brian Moynihan that the current situation is not as dire as in 2008, the financial giant's shares dropped 11 percent on Wednesday, resulting in a year-to-date decline of close to 50 percent. Bank of America was not the only player in the financial sector to experience a fall on Wednesday, as Citigroup, Morgan Stanley and Goldman Sachs fell by around 10 percent, with UBS, JPMorgan Chase, and Wells Fargo falling by around 7 percent.

While the extensive influence of credit rating agencies continues to be called into question, with analysts pointing out that credit ratings should be viewed as an informed opinion rather than a judgment, there is no doubt that investors in general look to credit ratings for guidance – especially in uncertain markets where some have suffered losses through unprecedented market volatility. Although Standard & Poor's was the only major credit rating agency to downgrade the US from AAA to AA+, investors are fearful that other AAA rated nations are in the firing line for downgrading. Speculation that France, Europe's second largest economy after Germany, would be the next to meet this fate, saw shares of French bank Societe Generale fall by 15 percent on the Paris Stock Exchange on Wednesday, with Germany's Deutsche Bank falling 12 percent, and Spain's Banco Santander losing 9.5 percent.

Standard & Poor's has received harsh criticism for downgrading the credit rating of the United States, and appears to have lost a measure of credibility in some investment circles. Moreover, double-dip recession fears are resurfacing, while Wall Street does battle once again with volatile markets. On Wednesday, the New York Stock Exchange invoked Rule 48 ahead of the opening bell, thereby giving the exchange the right to pause trading should markets experience extreme volatility. As the index of Wall Street's fear factor, the volatility index (VIX) climbed by close to 22 percent to a level of 43. Analysts note that anything above 30 is considered to be worrisome, however, the current reading is still lower than the nearly 90 recorded by VIX following the Lehman Brothers collapse in October 2008.

 


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