Equity markets plunged across the board to open up the week as the sting from Friday’s downgrade of U.S. sovereign debt by S&P sent markets into a tailspin. The Dow finished the day lower by 635 points, a loss of nearly 5.6%, while the broader indexes experienced even rougher sessions; the S&P 500 fell by 6.7% while the Nasdaq plummeted by 6.9% in Monday trading. As one might expect given the volatility in equities, commodity markets were extremely rocky throughout the day. Gold surged by nearly $70/oz. to finish at the $1,720/oz. level while oil crumbled thanks to fears over demand as the important commodity sank by nearly 7.5% or $6.5/bbl. Other commodities, and especially those in the industrial metal and grains category, also experienced weakness on the day, led by a nearly 4.6% loss for copper and a 3.9% loss for wheat.
Despite the downgrade to U.S. debt from AAA to AA+, Treasury bonds and the U.S. dollar in general saw inflows on the day. The greenback saw gains of nearly 2.3 cents against the euro and nearly 1.4 cents against the pound, although further weakness was seen against the yen as that currency traded below the 78 yen mark. Thanks to this ‘flight to quality’, yields on Ten Year Treasury bonds plummeted to just 2.35%, a nearly 22bps drop while Two-Year debt saw yields fall to just 0.27%. This demonstrated that although market participants were repricing risk, they were not ready to give up their Treasury holdings just yet.
One of the biggest losers on the day, and there were many, was the Financial Select Sector SPDR (XLF) which tumbled by 9.5% in the session. These steep losses came thanks to some horrendous performances out of some of the country’s largest banks– and biggest components of XLF– as Citigroup fell by 16.4% and Bank of America fell off a cliff, sinking by 20.3% in Monday trading. Beyond the downgrade, investors also focused in on a news report that noted that AIG plans to sue BAC over mortgage transactions in addition to seeking a $10 billion payment from the banking giant. Furthermore, BAC also disclosed that bad mortgages from Fannie Mae and Freddie Mac were on the rise, threatening earnings of the firm in the near future. This pessimism trickled down into regional bank operators as well, as SunTrust and KeyBank were also down double digits as well, underscoring the wide range of gloom affecting the financial corner of the economy to open the week [see holdings of XLF here].
One of the biggest gainers in the ETF world was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which gained 14.8% on the day. Today’s gains, which came on volume that exceeded 100 million shares, was largely a result of the broad market turmoil and the demand for safe havens and alternative assets. Since questions are beginning to appear over the health of the U.S. Treasury market, not to mention the pathetic yields that come along with this investment, many sought refuge in products such as GLD or VXX, which is an ETN representation of the ‘fear index’. The fund tends to do extremely well in times of great uncertainty and this recent market environment certainly qualifies. “Right now, investors are stretching in all directions trying to protect themselves,” said Andrew Wilkinson, Senior Market Analyst at Interactive Brokers. “Liquidation of portfolios and a general risk-off appetite is causing panic in traditional measures of risk.”. In just the past week alone, investors in VXX have gained close to 48.6% and nearly 70.9% in the past month period, suggesting that those who saw this coming have been richly rewarded [see fundamentals of VXX here].
Disclosure: No positions at time of writing.