US shares dive in wake of credit rating setback
In the first trading session since the historic decision by the Standard & Poor's ratings agency to strip the US of its cherished AAA credit rating, shares on Wall Street plunged by as much as 5% yesterday.
In London the FTSE-100 index ended lower for the seventh day in a row, having lost over 800 points, or 13.7%.
By contrast gold, a traditional safe haven in troubled times, hit yet another all-time high, at over $1,700 (£1,040) an ounce.
London shares are at their lowest since July 2010, just after George Osborne's Emergency Budget, challenging ministerial claims that their economic policy is bolstering investor confidence.
Investors have been especially spooked by remarks from David Beers, head of sovereign credit ratings at Standard & Poor's, who said: "We don't anticipate a scenario at the moment in which the US would quickly return to AAA."
He confirmed there is a one in three chance the US could be downgraded again.
More bad news came from the Organisation for Economic Co-operation and Development, the club comprising the world's advanced economies, which warned of a further slowdown in the global economy.
The OECD warned that growth rates in the US, Japan and Russia have peaked, while Britain, the eurozone and others are in a "continued slowdown".
The OECD's "leading indicator" for the UK - a signal about how the economy might progress over the next six months - fell for the sixth month in a row, and at an increased rate in June with the suggestion the economy will continue to flatline until next spring.
It comes as the Bank of England prepares to reveal its latest forecasts for inflation and growth tomorrow.
The Bank is expected to follow the Office for Budget Responsibility in admitting its projections have been wrong.
The rout began in Asia: the main stock index fell almost 4% in South Korea and more than 2% in Japan.
European markets opened later and fell too, with Germany down 3% and France 2.5%.
However, the European Central Bank's policy of buying Spanish and Italian government bonds to take the cost to Madrid and Rome of financing their public sectors back to manageable proportions seems to be working.
In contrast to their damning assessment of US political gridlock, S&P's officials had kind words to say about the UK and France's AAA ratings.
Mr Beers said he expected the UK Coalition to hold together until the next election and to implement its austerity plans with only minimal changes.
The agency moved its outlook on the UK's AAA rating from negative back to stable last October.
And John Chambers, who chairs the sovereign ratings committee at S&P's, praised France for a "well-designed fiscal policy" - in particular plans to raise the retirement age to cut the country's long term pension burden.
"The government got a lot of pressure from the street, but it didn't cave in to that pressure, and that underscored its credibility," Mr Chambers said.
Nonetheless, on one measure, the cost of insuring government bonds against default, the markets have already downgraded France - its government bonds are more costly to insure against wipe-out than those issued by Malaysia, Thailand, or Mexico.
A minority of analysts are starting to argue that the UK could be vulnerable because of its poor growth prospects.
Economists at UBS Bank commented: "The UK's AAA sovereign rating is vulnerable if the economy continues to disappoint on growth and the political response is seen to waver from a stringent fiscal consolidation plan.
"The key risk here is the impact of the downgrade on US economic growth and any spillover impact on Spain, Italy and France.
"On the political front, there is reason to be somewhat more comfortable. All in all, the fear in the UK is not so much about errors from policymakers, but rather, on the potency of the tools available to policymakers to address the crisis."
The current riots in London may also dent market confidence in the will of the Coalition to implement its programme of spending cuts in the face of social unrest.