Markets did rally a bit off their lows, but they still closed down sharply.

But first, the scoreboard:

Dow: -141.45
NASDSAQ: -29.52
S&P 500: -14.41

And now the top stories:

  • Obviously the huge news of the day was the S&P's downgrade of the US credit outlook. We'll get back to that in a bit, but first there's some foreign news to catch up on...
  • On Sunday, China delivered yet another reserve ratio requirement hike, responding to the hot-ish inflation numbers from the previous Friday.
  • More significantly, however, Sunday evening saw the huge success of the True Finns in the Finnish election, a result that threatens to throw a huge wrench into the European bailout parade. True Finn leader Timo Soini already says he wants to renegotiated the Portuguese bailout.
  • The impact on European affairs was pretty swift. The euro started diving immediately once currency trading began Sunday evening, and it never looked back after that.
  • Then in the early going in the US we got the bombshell of the day: While affirming the US credit rating of AAA, S&P issued a downgrade to its outlook, saying there was a 1 in three chance of an actual ratings downgrade. It cited the wide gulf between the White House and Congress as evidence that no progress was likely to come about.
  • The market reaction was swift. Stocks tanked. The dollar tanked. Treasuries tanked. Commodities tanked.
  • And then, not long after that... the FX and rates markets began to turn around. First short-term yields started erasing their losses. Then the dollar actually GAINED against the other currencies that it had been down against, as investors liquidated winners and sought safety. Gold and silver, which initially spiked hard, fell (although they came back later in the day). And then, of course, stocks came back. At one point the Dow as down 250, or over 2%.
  • On the corporate front, the big earnings of the day came from Citigroup, which actually ended 1% higher. JNJ slipped after news reports of a bid for device maker Synthes. Lululemon -- as always, had a big day.