The interest rates on Spanish and Italian bonds plummeted Monday after the European Central Bank expanded its purchases of government debt to support Madrid and Rome for the first time.
Stocks, however, fell in Europe and Asia, the dollar continued to weaken against most major currencies and gold topped $1,700 for the first time following the decision by Standard & Poor’s to lower its top-notch credit rating for the United States. Trading in index futures suggested a poor start for Wall Street as well.
As European markets opened, the yield on 10-year Spanish bonds dropped by 83 basis points, while comparable Italian yields fell 79 basis points. News agencies cited traders as saying the E.C.B. was intervening in the secondary market to buy the securities from those two countries.
The E.C.B. declined to comment Monday. But in a statement issued late Sunday after an emergency conference call, the central bank said it would “actively implement” its bond-buying program to address “dysfunctional market segments.” It did not specify which bonds it would buy, but hinted it would be Spain and Italy by welcoming their efforts to restructure their economies and cut spending.
Previously the bond-buying had been limited to bonds from Greece, Portugal and Ireland — the three euro-zone countries that have already received international bailouts. Fears that the bloc’s sovereign debt crisis would spread to the much bigger economies of Italy or Spain had contributed greatly to recent market losses.
European leaders agreed last month to revamp their bailout fund to allow it to purchase bonds on the secondary market, but those powers still have to be drafted and ratified by national parliaments, which will take weeks, at best.
At least until then, the E.C.B. has been reluctantly saddled with the primary role in addressing the crisis of confidence in the region’s government finances. The bank got backing late Sunday from the Group of 7 leading industrialized nations, which said late Sunday that it was ready to “take all necessary measures to support financial stability and growth.”
Gilles Moëc, an economist in London with Deutsche Bank, said the central bank’s move was “not a silver bullet,” especially considering the impact of the downgrade and lingering concerns about the economic recovery there.
Still, he described it as another positive development for European cohesion.
“For all their delays and contorted procedures, the European partners since the beginning of this crisis have always moved, ultimately, in the same direction: creating evermore financial solidarity across its members, and breaking taboo after taboo to do so,” he wrote in a research note.
European equities opened higher despite a sell-off earlier in Asia, but the rally fizzled, dashing hopes that the E.C.B.’s actions would be enough to soothe broader market jitters.
In afternoon trading Monday, the Euro Stoxx 50 index, a barometer of euro zone blue chips, was down about 1 percent. Financial shares, which had been up by as much as 5 percent earlier, retreated into negative territory. The FTSE 100 index in London fell nearly 2 percent.
The euro fell to $1.4263 from $1.4282 late Friday in New York. But the dollar hit new lows against the Swiss franc, declining to 0.7485 franc from 0.7674 franc, and fell to 77.65 yen from 78.40 yen, before recovering a bit.
Standard & Poor’s 500 index futures fell 2.4 percent, suggesting stocks would fall at the opening on Wall Street.
In Asia, the Tokyo benchmark Nikkei 225 stock average fell 2.2 percent. The main Sydney market index, the S&P/ASX 200, fell 2.9 percent. In Hong Kong, the Hang Seng index fell 2.2 percent, and in Shanghai the composite index closed 3.8 percent lower.
The U.S. downgrade and European debt crisis are not the only problems weighing on equities. The recovery in the global economy is lagging the expectations of many analysts, with the Organization for Economic Cooperation and Development reporting Monday that its composite leading indicators for June point to “a slowdown in activity in most OECD countries and major non-member economies.”
U.S. crude oil futures for September delivery fell 3.6 percent to $83.76 a barrel.
Comex gold futures rose 3.7 percent to $1,712.40 an ounce, their first time to break through $1,700. Adjusted for inflation, however, gold remains well below its record of more than $2,400 an ounce, according to Capital Economics.
By the time Standard & Poor’s made its move on Friday, Wall Street had suffered its worst week since the financial crisis, with the Dow Jones industrial average falling 5.75 percent, a slide punctuated by a 512-point drop on Thursday.
On Wall Street, traders and strategists trekked to their offices on Sunday in scenes reminiscent of the fateful weekend before Lehman Brothers collapsed in 2008. Bank of America , Merrill Lynch, Barclays, Credit Suisse and Morgan Stanley all hosted conference calls for anxious investors, and traders plotted strategy for what they expected to be a tumultuous day on Monday.
“Markets have lost confidence in the economic recovery and policy makers. This is increasing the risk of bringing about a self-fulfilling prophecy, with markets driving down the economy,” Robert Subbaraman, chief economist for Asia at Nomura, said in a conference call Monday.
Many analysts stressed, however, that because the S.&P downgrade had been well telegraphed, it would probably not raise U.S. borrowing costs sharply.
“It’s important to note that there is no regulatory requirement for U.S. investment institutions to sell long-term U.S. Treasuries if they are not rated AAA, ditto for short-term Treasuries,” analysts at UBS wrote in a note on Monday.
In addition, they wrote, Asian central banks “don’t have much choice” but to continue to buy U.S. Treasuries, in addition to intervening in currency markets, to help protect their exporters.
Blackrock echoed this in a statement Monday: “The downgrade of U.S. sovereign credit by S.&P. on Friday reflects facts that have been well known to the market for some time. So, it does not imply a fundamental increase in risk, and we don’t believe that investors should change their behavior based solely on the downgrade.”
Investors also appeared to be shrugging off some positive developments, like the normalization of supply chains following the disaster in Japan, falling gas prices and the end of the debt ceiling deadlock in the United States, Mr. Subbaraman of Nomura said.
Still, the recent market worries extended far beyond the single issue of the credit rating, to the wider U.S. economic recovery, which appears to be floundering. Jobs data released Friday showed a better picture than expected and helped support Wall Street on Friday. But a flurry of other data have painted a bleak picture in recent weeks.
“What really matters is the fact that the U.S. is struggling to sustain growth, U.S. monetary policy is likely to remain on hold for longer than previously thought, and Europe will remain problematic for the time being,” the UBS analysts wrote.
The move by the E.C.B. was a concession that Europe’s previous efforts to stanch its debt crisis have fallen short, and underscored the importance of propping up Italy and Spain. Those two countries are the third and fourth largest economies in the 17-nation euro zone (after Germany and France), and their collapse would threaten the euro currency and intensify the turbulence in world markets.
Finance officials from the Group of 7 — including the U.S. Treasury secretary, Timothy F. Geithner, and the Federal Reserve chairman, Ben S. Bernanke — also held a conference call Sunday to discuss the U.S. downgrade and other challenges.
Afterward, Yoshihiko Noda, the Japanese finance minister, told reporters that global markets’ trust in both U.S. Treasury securities and the dollar remained “unshaken.”
The Obama administration also announced that Mr. Geithner would be staying on as secretary, a move that appeared to be timed to try to reassure nervous investors.
For Asia, which, with the exception of Japan, is less indebted than many Western nations, and generally enjoys solid growth and domestic demand, the outlook remains comparatively positive, analysts in the region stressed. That view was shared by S.&P., which noted Monday that “in and of itself, there is no immediate impact on Asia-Pacific sovereign ratings” from its downgrade of the United States.
Further down the line, however, “the U.S. rating change, together with the weakening sovereign creditworthiness in Europe, does point to an increasingly uncertain and challenging environment ahead.”
The growing market and economic uncertainties, it added, “are negative factors for Asia-Pacific sovereign ratings.”
This week, the focus may shift to policy makers at the Federal Reserve , who are scheduled to meet on Tuesday, but their options are narrower than they have been at other moments of turbulence in global markets. Short-term interest rates are already near zero and cannot be lowered further, while long-term rates are also at historical lows.
Another series of huge purchases of government bonds and other assets — so-called quantitative easing— remains an option, but two earlier rounds have done little to bolster consumer confidence or economic growth.