Market sentiment was not helped by the G-7 statement which pledged to 'take all necessary measures to support financial stability and growth'. In Asian session, the MSCI Asia Pacific Index fell more than -1%, responding to S&P's downgrade of US' debt rating. In the currency market, the US dollar declined against the euro and the yen while commodity currencies also slipped amid risk aversion. In the commodity sector, gold spiked to a new record high of 1698.9 as investors lost confidence in fiat currencies. Oil prices resumed the selloff after the recovery last Friday.
Group of Seven nations met and attempted to find ways to contain renewed strains on financial markets. In the joint statement released, members pledged that they will' take all necessary measures' to ensure liquidity, and to support financial stability and growth. There will also be measures t o act against 'excess volatility and disorderly movements in exchange rates' when needed.
Separately, the ECB signaled it will buy Italian and Spanish bonds as it actively implements its Securities Markets Program. The central bank stated that the program has been 'designed to help restoring a better transmission of our monetary policy decisions - taking account of dysfunctional market segments - and therefore to ensure price stability in the euro area'. The move was objected by Germany's Bundesbank and was against the ECB's pursuance of independence and credibility. Yet, it's probably the only way out as peripheral bond yields keep rising sharply even after EU leaders announced new bailout measures last month.
It appears that gold is the only trustworthily safe asset when US debts are downgraded and world central bankers have begun another round of easing. S&P cut the US' debt rating by one notch to AA+ and kept its the outlook at 'negative' after market close on Friday. The agency said the downgrade reflects that the fiscal consolidation plan that agreed earlier in the month falls short of what 'would be necessary to stabilize the government's medium-term debt dynamics'. A downgrade to AA with 2 years is possible of spending reduction turns out to be lower than expected, higher debts due to 'new fiscal pressures' or interest rates increase. Moody and Fitch currently keep US' AAA ratings unchanged but said downgrades cannot be ruled out if the economy deteriorates and fiscal consolidations fail to take it effect. S&P's downgrade pressured the US dollar, thus supporting gold. This, together with intervention and non-standard monetary easing measures by SNB, BOJ and ECB, as well as speculations of Fed's QE3, has weighed down investor's confidence on currencies.