Wall Street was set to track a sharp drop in global equity markets on Monday after rating agency Standard & Poor's cut the top-tier AAA credit rating of the United States, rattling already-jittery investors.
Standard & Poor's move came late Friday after a wild week for Wall Street -- its worst in more than two years -- as lingering concerns about sluggish economic growth and heavy public debt loads in developed economies hit sentiment.
The impact of S&P's rating cut was felt in Asia and Europe. Japan's Nikkei stock average slid 2.2 percent at the close on Monday, while the FTSEurofirst 300 index of top European shares fell 2.1 percent in early trading. MSCI's all-country world stock index dropped 1.2 percent.
In U.S. trading, market sectors most sensitive to the economy, such as the banking and natural-resource sectors, were set to take the brunt of selling. United States Steel Corp fell 5.8 percent to $31.30 in premarket trading, while Citigroup Inc dropped 4.8 percent to $31.82.
Even the European Central Bank's dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling.
What's concerning us and holding us back from buying what we think is value is that the ferocity of the momentum of the downside is still quite strong, said Paul Zemsky, head of asset allocation at ING in New York
Zemsky said he sold equities and commodities last week and is waiting for signs that the selloff is easing before increasing equity exposure again.
S&P 500 futures fell 31.7 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 266 points, and Nasdaq 100 futures shed 56.5 points.
Last week's steep selloff in equities wiped about $2.5 trillion off global market valuations. The S&P 500 has fallen over 12 percent since the end of April, with much of that selling coming on heavy volume last week. The index has retreated 11 percent in the last 11 sessions.
Analysts said the S&P 500 index could test Friday's intraday low of 1,168.09. Some traders look for a pullback to the 32.8 percent retracement of the rally from the index's bear market low on March 2009. That level is around 1,100.
Peter Cardillo, chief market economist at Rockwell Global Capital in New York, said he expected an intraday reversal after sharp falls at the open, similar to Friday's action.
Hedge funds are selling out at levels that they are somewhat compelled to, so it feeds on itself said, he said. The market is grossly oversold, valuations are attractive, and I think the market at this point has already discounted a growth slowdown.
Safe-haven assets were in demand. Gold vaulted above $1,700 an ounce for the first time on Monday and hit a record $1,715.01.
Resource-related stocks will be under pressure as crude oil prices fell 4.1 percent to below $84 a barrel on concerns over the economic outlook. Copper fell to a five-week low.
Sentiment worsened after the S&P cut the U.S. long-term credit rating by a notch to AA-plus late Friday on concerns about debt in the world's largest economy. The downgrade could eventually raise borrowing costs for the U.S. government, companies, as well as consumers.
Moody's on Monday repeated a warning it could downgrade the U.S. rating before 2013 if the fiscal or economic outlook weakens significantly, but said it saw potential for a new debt agreement in Washington to cut the budget deficit before then.
(Editing by Jeffrey Benkoe)