Published: August 18, 2011
After just a few days of calm, stock markets heaved again on Thursday, sending major American indexes down as much as 5 percent on persistent worries about the economy and Europe’s debt problems.
The turmoil of last week returned with a vengeance as investors dumped stocks of companies that would suffer if worldwide growth slowed and the United States, in particular, broached another
recession.
But the declines began in Asia and in Europe, where an unidentified bank had resorted to borrowing from the European Central Bank, hinting of strains in the
banking system that some fear could ripple to the United States. Europe’s chronic debt problem continues to plague the Continent’s banks because so many of their assets are invested in the region’s troubled countries.
Investors rushed into United States Treasuries as a safe haven, despite unease about how the government will address its deficit and economic slowdown. Bond prices rose and the yield on the 10-year bond fell below 2 percent for the first time since at least the early 1960s.
The Dow Jones industrial average fell 419.63 points on the day, or 3.7 percent, to 10,990.58. The Standard & Poor’s 500-stock index dropped 4.5 percent to 1,140.65. The technology-laden Nasdaq composite fell the most, ending down 5.2 percent at 2,380.43.
Gold rose along with Treasuries as investors sought safety. Oil prices fell on expectations that demand would be tempered in a slowdown.
The S.& P. 500 has now fallen more than 16 percent from its April 29 peak. It is once again near bear market territory, defined as a fall of 20 percent.
Analysts said the fear stalking markets was not going away. “We took a little break for a couple days, and it is reinstating itself and I just think that this should probably be expected,” said Nick Kalivas, an analyst at MF Global in New York.
After the sell-offs in Asia and Europe on Thursday, stock prices opened lower in the United States on a spate of dismal economic data. Consumer prices suggested inflation was picking up, and jobless claims rose, defying hopes that the nation’s high unemployment rate might slide.
The big stock plunge, though, came around 10 a.m., when the Federal Reserve Bank of Philadelphia reported a sharp drop in regional manufacturing activity in its monthly survey, deepening worries that the economy may dip back into recession.
That report came a day after Morgan Stanley lowered its forecasts for both worldwide and domestic economic growth, partly because it expected cuts in government spending in Europe and the United States to damp recoveries. It described the United States and the euro area as “hovering dangerously close to a recession” and said it would not take much in the form of additional shocks to tip the balance.
The yield on 10-year
Treasury bonds dropped to 1.97 percent on the Philadelphia Fed news before recovering to close at 2.07. According to data from Bloomberg, that low during the day was the lowest yield since at least 1962. Global Financial Data, a supplier of historical financial and economic statistics, said it was the lowest since 1950.
“What freaked me out today was that Philly Fed number,” said James W. Paulsen, chief investment strategist for Wells Capital Management. “That was the first number that says recession.”
That sentiment was echoed by Eric Green, an economist at TD Securities. “When you have an economy operating at stall speed facing these headwinds, it does not take much to tip it over the edge,” he said. “You read a report like this and you think we are going over the edge.”
Credit Suisse said in a note that if the Philadelphia numbers proved a national barometer, and that was unknown, “then a recession likely began in August.”
The latest worries about Europe’s banks flared after an unnamed lender tapped an emergency borrowing program, which was established by the European Central Bank to ensure that firms had ample money in dollars.
The bank borrowed $500 million, a relatively modest sum. But it was the first time a bank had turned to the special program since February, and it set off worries that at least some banks might be struggling to find dollars to finance their operations.
Regulators and bank executives played down the possibility that it could lead to a repeat of the 2008 financial crisis, when credit markets froze virtually around the world.
But that news, combined with a report that the New York Federal Reserve has in recent weeks been more closely monitoring the American subsidiaries of European banks, pushed down bank shares in Europe and then in the United States.
The shares of Dexia, a large Belgian bank, fell 14 percent. Société Générale fell 12.3 percent. Shares in two British banks, Royal Bank of Scotland and Barclays Bank, fell sharply. In the United States, Citigroup fell 6.3 percent to $27.98, and Bank of America fell 6 percent to $7.01.
American banks are probably in better financial shape than they were on the eve of the 2008 crisis. But the sell-off reflects fears that the troubles brewing among European lenders could spread across the Atlantic.
“It is just a measure of the whole negative sentiment in the markets,” said Mr. Green of TD Securities.
Asian Pacific stock markets, which missed the worst of the selling on Thursday, fell sharply in early trading on Friday. The Nikkei 225 in Japan was 2.15 percent lower midday. Stocks in South Korea sagged 4.3 percent, and the major index in Australia was down 2.64 percent.
Gold rose to a non-inflation adjusted record of more than $1,837 an ounce. Futures on the S.& P. 500 index were o.4 percent lower in Asia.
The United States stock market began to gyrate wildly this month after Standard & Poor’s decision late on Aug. 5 to downgrade America’s long-term credit rating. There were alternating gains and losses of more than 4 percent on four subsequent trading days — which had never before happened in the history of the S.& P. index, which dates to 1928.
Stocks were buoyed by the Federal Reserve’s announcement that it would keep short-term interest rates close to zero for the next two years. This week, corporate profits spurred some optimism. So did a $12.5 billion deal by Google.
On Thursday, the sell-off was broad, with all 10 sectors of the S.& P. 500 finishing lower; most rattled were industrial and material companies. So far this month, financial stocks are the worst performers.
Extreme volatility is likely to continue, market analysts say, as long as there is uncertainty about how the chronic debt crisis in the euro zone will be resolved and about whether the global economy is slipping. Policy makers in Europe and the United States have yet to demonstrate the kind of forceful leadership that would instill confidence, they assert.
The VIX, a measure of stock market volatility, which eased last week, snapped back by about one-third on Thursday, to a reading of 42.67, suggesting that investors had grown more fearful.
So far, at least, credit markets in the United States have shown few signs of stress, bolstered by the cheap financing supported by the Federal Reserve.
But the European credit markets are signaling some increased levels of strain, though still far from that experienced nearly three years ago.
For example, interbank lending rates in Europe — a measure of banks’ willingness or reluctance to lend to each other — have risen. Swap rates in the foreign exchange market, which allows banks to swap euros for dollars, have doubled from a few months ago. They remain less than half the levels reached during the financial crisis.
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