Standard & Poor downgraded U.S. long-term debt to AA+ (from AAA) at the end of last week, and its effects are now being felt in Asia.
Investors were waiting for the other foot to fall in Asia, and it has with a resounding thud. At the end of Monday trading for Asian stock markets, all markets have dropped across the board:
- Nikkei stock index in Tokyo fell 2.2 percent.
- The Hang Seng index in Hong Kong dropped by 3.2 percent.
- The Shanghai composite index dipped by nearly 3.6 percent.
- The Kospi in South Korea fell 3.8 percent, its biggest decline since November 2009. The sell-off was so brisk that trading had to be stopped at one point during the day – when the index tumbled by more than 10 percent for more than a minute, it triggered an automatic stoppage.
Trading has not yet stopped in Singapore, where the Straits Times Index was down 4.8 percent towards the end of the trading day. That would be the largest one day decline since June 2010.
Is Gold the Answer?
By lowering its credit rating of the United States, Standard & Poor also planted seeds of doubt in investor’s minds. Much of the decline can be attributed to panic-selling, as investors look to sell what they perceive to be increasingly risky asset classes. And gold, considered a haven in times of uncertainty, continues its upward trend that has continued unabated for weeks. Gold was valued at $1,697 per ounce by late morning in Asia. Gold is a hedge in times of economic uncertainty, and its escalating price indicates more and more investors are moving out of tangible assets. Although it keeps hitting all-time highs, gold will continue to be a haven against market volatility for investors. Add to that fears of inflation and a weakening dollar, gold is likely to become more popular than it already is.