U.S. stocks tumbled on Monday as Standard & Poor's downgraded the credit outlook of the United States, adding to worries about the global economy after China curbed liquidity.
Investors also were focused on Greece where financial markets are increasingly convinced the country will have to renegotiate the terms of its public debt, recognizing
that its economy cannot grow fast enough to service a burden that is set to swell to 160 percent of national output.
You saw the dollar gain on worries over Greek sovereign debt restructuring, said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. That has added to nervousness (because) this market has had trouble dealing with a stronger dollar vis-a-vis the euro.
The 200-day correlation between the S&P 500 and the euro is near 0.7 and has been positive since the fourth quarter, with a perfect correlation scoring 1.
Greek officials denied again on Monday that some form of debt rescheduling was imminent.
S&P downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.
The CBOE volatility index <.VIX>, better known as Wall Street's fear gauge, surged more than 20 percent, its largest percentage jump since March 16.
The S&P 500 fell for a second week on Friday as concern spread that growth expectations may have to be trimmed. As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities <.GSPU>, consumer staples <.GSPS> and healthcare <.GSPA> posted the smallest losses.
Caterpillar Inc , hurt by both expectations of ballooning funding costs and by China's move to harness liquidity, tumbled 4.2 percent to $102.69.
Referring to the S&P credit action, Krosby said, Ultimately it's going to cost companies more money to fund. It makes the cost of capital go up.
The Dow Jones industrial average <.DJI> dropped 220.39 points, or 1.79 percent, to 12,121.44. The Standard & Poor's 500 Index <.SPX> fell 21.84 points, or 1.65 percent, to 1,297.84. The Nasdaq Composite Index <.IXIC> slid 52.25 points, or 1.89 percent, to 2,712.40.
Over the past number of weeks we've seen indications the market has started to get more defensive, Krosby said. The market is poised for a recalibration unless we see a turnaround in guidance from companies in the next two to three weeks.
Among the companies reporting earnings Monday, Halliburton Co , the world's second-largest oilfield services company, fell 1.1 percent to $46.31 and drugmaker Eli Lilly fell 1.4 percent to $35.49.
China raised banks' required reserves 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.
China's move and the cut in the U.S. outlook hurt basic materials prices, sending the Reuters/Jefferies CRB index of commodities <.CRB> down more than 1 percent.
Miner Freeport-McMoRan Copper & Gold Inc fell 2.3 percent to $50 while Dow component Alcoa Inc fell 2.5 percent to $16.11.
Further adding to global concerns, Athens reiterated it has no plans to restructure its government debt, a move its central bank chief said would be catastrophic, but markets speculated that some form of debt rescheduling was likely.
(Reporting by Rodrigo Campos; Editing by Kenneth Barry)