MarketView for April 18

Summary 

The major equity indexes were down on Monday in excess of one percent as sovereign debt fears on both sides of the Atlantic and China's monetary tightening hurt the outlook for global economic growth. However, equities ended off their lows though the decline was still the largest in a month.

Standard & Poor's revised its outlook on the United States credit rating downward to "negative" on a poor budget outlook, while China took additional measures to curb liquidity.

Meanwhile, financial markets are increasingly convinced that Greece will have to renegotiate the terms of its public debt, though Greek officials denied that some form of rescheduling was imminent.

The CBOE Volatility index rose 10.7 percent after earlier climbing as much as 24.5 percent, its largest daily percentage jump since February 22. At the same time, the S&P 500 index fell below 1,300 for the first time since March 24, though it later rebounded above that level. Short-term support is seen near the 1,285 area.

Volume was low, with about 7.83 billion shares traded on the three major exchanges,  a number that was below last year's daily average of 8.47 billion shares.

Citigroup was unchanged, closing at $4.42, after it reported a first-quarter profit that was slightly higher than expected, while Eli Lilly closed down 1.1 percent to $35.62 on concerns about looming generic drugs competition.

China raised its required reserve amount for banks on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second-largest economy.

Caterpillar hurt both by expectations of ballooning funding costs and China's move to harness liquidity, slid 3.1 percent to $103.90.

Among the winners and losers on Monday, Exxon Mobil fell 1.4 percent to close at $83.10, while Alcoa closed down 2.3 percent at $16.14.

S&P Says It Might Cut Treasury Credit Rating

Monday saw Standard & Poor's threaten to downgrade the United States' prized AAA credit rating unless the Obama administration and Congress find a way to slash the seemingly never-ending federal budget deficit within two years. S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, placed a negative outlook on the country's top-notch credit rating and said there's at least a one-in-three chance that it could eventually cut it.

A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.

The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.4 trillion budget deficit and $14.27 trillion debt burden.

A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said. Even so, Austan Goolsbee, the head of the Council of Economic Advisors, downplayed S&P's move, telling CNBC Monday it was a "political judgment" that "we don't agree with."

S&P downgraded Japan's rating earlier this year for the first time since 2002, saying Tokyo had no plan to deal with its mounting debt burden. However, almost all Japanese debt is held by domestic investors. That means the country need not depend on foreigners for financing.

Moody's, S&P's main rival in the ratings business, also maintains a Aaa credit rating - its highest - on the United States.

The ratings agency said neither the White House nor Republican plan does enough to fix the shortfall, and the tension between the parties has cast doubt on whether they will be able to work together on a long-term solution.

A congressional report last week blamed ratings companies such as S&P and Moody's  for triggering the financial crisis when they cut the inflated ratings they had applied to complex mortgage-backed securities. Moody's put some issues of U.S. Treasury debt on watch for a downgrade in 1996 when the White House and Congress failed to extend the government's debt ceiling. The two sides are heading for a similar showdown over the $14.3 trillion legal borrowing limit, which will have to be extended within weeks.

The debt burden has grown exponentially after a housing bubble burst in 2007 and set off a world financial crisis that toppled several Wall Street banks, drove up the jobless rate and thrust the global economy into recession. Governments around the world were forced to increase public spending to prevent their economies from lurching into an even worse depression. The tactics helped spark a recovery but left the United States and other advanced economies, which were hit hardest by the crisis, with staggeringly large debt burdens.