August 18, 2011
Stocks Close Down Sharply Over Anxiety on Global Economy
After just a few days of calm, stocks declined steeply on Thursday in a worldwide sell-off. The downturn was driven by fresh concerns that the worldwide economy is slowing and that Europe’s debt crisis is putting strain on the financial sector.
After declines in Asian and European markets, stocks in the United States opened sharply lower and continued to slide. The Standard & Poor’s 500-stock index closed 53.24 points, or 4.5 percent, lower at 1,140.65. The Dow Jones industrial average fell 419.63 points, or 3.68 percent, to 10,990.58, and the Nasdaq composite was down more 131.05 points, or 5.2 percent, at 2,380.43.
The yield on the Treasury’s 10-year note fell below 2 percent for much of the day, the lowest level on record, as investors turned to the safety of fixed-income securities. Gold rose. Oil fell as markets lowered their expectations of global economic growth.
Financial stocks were down more than 5 percent as were other crucial sectors like energy stocks, materials and industrials.
Bank of America and Citigroup both closed more than 6 percent lower.
Investors have been anxious in recent weeks over the euro zone sovereign debt crisis and the pace of the global economy. On Tuesday, markets shed some of the gains that they had recovered in previous trading session that had propelled them to recover from steep losses the week before in the wake of the Standard & Poor’s Aug. 5 downgrade of America’s long-term credit rating. Wednesday the market ended mostly flat.
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But analysts have been under no impression that the underlying problems causing the volatility in the markets have receded, with some renewing the debate on an emerging recession.
And on Thursday the skittishness of investors was evident.
Investors were alarmed when a single bank, out of nearly 8,000 in the euro area, took advantage of a European Central Bank program that ensures institutions have ample access to dollars. The bank, which was not identified, borrowed $500 million on Wednesday from the central bank, a relatively modest sum. But it was the first time any bank had tapped the dollar pipeline since February.
A shortage of dollars for European banks was one of the features of the 2008 financial crisis.
Fears were inflamed further when The Wall Street Journal, citing people it did not name, reported on Thursday that United States regulators were scrutinizing whether European banks would be able to continue financing themselves.
“Currently many banks cannot access term-funding markets at reasonable rates,” analysts at Morgan Stanley said in a note. “As a result, commercial banks continue to tighten their credit conditions, albeit marginally, to both their corporate and retail clients. If these term-funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further.”
Some analysts counseled calm, saying that while there is clearly stress in the market it is still far from 2008 levels. “There is undoubtedly some tension around,” said Jon Peace, a banking analyst at Nomura in London. But he added, “I think the market is still overreacting to this funding issue.”
Bank funding rates in the United States have remained contained, but in Europe some stresses are appearing.
Interbank lending rates — a measure of banks’ willingness to lend to one another — have increased, though they are still below levels reached in 2008.
On Thursday, the Vix, a measure of stock market volatility, jumped sharply. It rose to 44.78 by the end of the day. The measure is sometimes called the fear index; Vix values above 30 are associated with high levels of market uncertainty and anxiety. The index rose during the turmoil last week but had eased over the last few days to just above 30 points.
The sharp drop in the equities market comes amid a period of high volatility that has been accentuated by low trading volumes, concerns over the euro zone sovereign debt and its potential impact on the banking sector, and recent data that has economists lowering their outlooks for global economic growth.
Another measure of funding stress, swap rates in foreign exchange markets where banks swap euros for dollars, now stand at around 82 basis points — double where they stood a few months ago, though still less than half of their levels in the depths of the 2008 crisis.
“It is a sign of risk aversion,” said Eric Green, an economist at TD Bank. “There is a lot of stress there.”
Maneesh Deshpande, head of United States derivative strategy at Barclays Capital, said another sign of investors’ nervousness was the cost of downside protection in the stock market. He said investors had become nervous about big market moves since the large sell-offs in 2008. “People are much more concerned about downside moves,” he said. “The wounds from 2008 are substantial.”
As markets in Europe declined on Thursday, the trend accelerated in the United States after new economic data on factory activity, jobs and prices.
A monthly survey by the Federal Reserve Bank of Philadelphia showed that factory activity in the mid-Atlantic region plummeted to a reading of negative 30.7 points in August, indicating contraction and falling to the lowest level since March 2009. It was up 3.2 in July.
“This was obviously a terrible report, and, if sustained, readings like these would be consistent with recession,” said Joshua Shapiro, the chief United States economist for MFR. “Looking ahead, a good deal will hinge on the consumer, and therefore the path of the labor market recovery will be a central variable,” he said in a commentary.
But the jobs market has continued to show weakness. The latest data on Thursday showed initial jobless claims last week increased by 9,000, to a seasonably adjusted 408,000, and exceeding analysts expectations.
The National Association of Realtors said home sales fell 3.5 percent last month to a seasonally adjusted annual rate of 4.67 million homes. This year’s pace is lagging behind last year’s, which were the weakest in 13 years.
In another report, the Labor Department said consumer prices rose rose 0.5 percent in July, the fastest rate in four months, pushed up by gasoline prices. It followed a decline of 0.2 percent in June.
The sell-off in stocks on Thursday was also driven by a Federal Reserve governor’s comments regarding the state of Europe, said Lawrence Creatura, portfolio manager at Federated Investors. “The Fed for the first time in 19 years is really quite divided in some of their voting and communications.”
Mr. Creatura was referring to remarks made by Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, who said Wednesday, in a report by Bloomberg, that the Fed would probably need to raise interest rates before mid-2013 and that policy makers should have waited to see how the economy performed before pledging to hold rates at record lows for two years.
“It was inappropriate policy at an inappropriate time,” Mr. Plosser said in a Bloomberg radio interview in New York.
Mr. Plosser’s statement came after the rare promise made earlier this month by the Federal Reserve in which it pledged to hold short-term interest rates near zero through at least the middle of 2013.
But while the economic data weighed on the markets, it was mostly euro zone troubles that overwhelmed them.
“I think the economic numbers, combined with further problems in the euro zone, is hitting a market that was prone to selling anyway, so fundamentally you are not getting good news,” Alan B. Lancz, president of Alan B. Lancz & Associates, said.
Asked about the financial sector, he said that concerns over the capital levels in European banks would lead to scrutiny of how much exposure to them banks in the United States have.
He said the aftermath of the meeting between the leaders of Germany and France, the euro zone’s two largest economies, earlier in the week failed to meet the expectations of the market for sufficient action in addressing the euro debt crisis.
“It was almost like a perfect storm of events,” he said, referring to the composite of worries that pushed down the financial markets on Thursday.
Stocks closed sharply lower in Europe. The Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 5.3 percent, while the FTSE 100 index in London fell 4.5 percent.
Asian shares also fell. The Tokyo benchmark Nikkei 225 stock average was down 1.3 percent, while the S.& P./ASX 200 in Sydney fell 1.2 percent. In Hong Kong, the Hang Seng index fell 1.3 percent, and in Shanghai the composite index was 1.6 percent lower.
http://www.nytimes.com/2011/08/19/business/daily-stock-market-activity.html?_r=1&pagewanted=2&emc=na
