By GRAHAM BOWLEY and CHRISTINE HAUSER
(New York Times) -- Fears that the fragile economic recovery
in the United States might be threatened by the financial and
political crisis in Europe gripped Wall Street on Thursday,
sending the stock market into a sharp decline and leaving anxious
traders wondering where the pain might stop.
The 376-point drop for the Dow Jones industrial average
punctuated what amounts to a slow-motion crash that began in late
April. The Dow has now plunged more than 1,000 points in a matter
of weeks, marking what is known as a market correction — a sort
of mini-bear market characterized by a 10 percent decline in a
short period of time.
With Thursday’s sell-off, this broad decline gained momentum
and quickly spread beyond stocks to commodities like copper and
oil, which are considered bellwethers of the industrial economy.
As traders downgraded their forecasts for economic growth,
the price per barrel of crude oil fell roughly 8 percent in
intraday trading, before recovering to end nearly 2 percent
lower, at $68.01.
Nagging worries that Europe’s debt crisis could spread,
compounded by uncertainties over financial regulation on both
sides of the Atlantic, have set investors on edge the world over.
“People are learning to think the unthinkable,” said Willem
Buiter, chief economist of Citigroup. Many worry that Greece and
even other economically vulnerable nations like Spain or Portugal
will be unable to pay their debts despite a sweeping rescue
effort by the European Union.
By the close, the Dow was down 376.36 points, or 3.6
percent, at 10,068.01. In a see-saw period of months this year,
the index closed at a recent low of 9,908.39 on Feb. 8, climbed
to a close of 11,205.03 on April 26, and then fell back by more
than 10 percent since then.
The broader Standard & Poor’s 500-stock index closed down
43.46 points, or 3.9 percent, at 1,071.59, the biggest one-day
drop since April last year. The Nasdaq composite dropped 4.1
percent.
The unilateral decision by Germany this week to ban certain
speculative trading, a move rebuffed by some other European
nations, has unsettled investors.
The German government did not consult its partners before
issuing the change, adding to the sense that new financial
regulations will start arriving piecemeal and that Europe’s
leaders are not united in addressing the Continent’s broadening
crisis.
“Investors are struggling to adjust to a new regime where
politics is more important than before,” said Gianluca Salford, a
strategist at JPMorgan Chase in London.
On Thursday evening, the Treasury Department announced that
Secretary Timothy F. Geithner would travel to Europe next week to
discuss the economic crisis there with Britain’s new chancellor
of the exchequer and with the president of the European Central
Bank.
The uncertain progress of financial reform in the United
States has also weighed on the markets.
Across Wall Street, banking analysts are busy tallying up
the financial impact of legislation as it comes up for a Senate
vote. Tough new credit card rules have already chipped away at
the bottom line of the biggest banks. Now, their derivatives,
debit card and proprietary trading businesses could face
similarly heavy restrictions under new rules.
A Goldman Sachs research report, released Monday, said the
proposed legislation could reduce earnings at 28 of the biggest
banks by more than 20 percent.
For the first time there was talk of capital flight from
countries like Germany and Britain to perceived safe-havens like
Switzerland. And across the globe investors fled from risky
currencies, bonds and stocks to safer assets like the dollar, the
Japanese yen and United States bonds.
The yield on the 10-year Treasury bond — the benchmark
global interest rate — fell to 3.21 percent, its lowest level
this year and a clear sign of investors seeking a safe haven.
“There has been a flight to quality — a flight to the
dollar, investment grade bonds and even within the stock market
toward higher-quality companies,” said Matthew S. Rothman, global
head of quantitative equities strategy at Barclays Capital.
There were other reasons for the jitters on Thursday —
violence in Thailand, political tensions between North and South
Korea, and yet another labor strike in Greece over the proposed
austerity measures, all of it adding to the nervousness of
investors.
But traders and analysts said the biggest factor unnerving
markets was the continuing prospect that European governments
might not have done enough to stem the panic over Greece and
other heavily indebted nations, and that their problems might
spill to the United States, affecting the pace of economic
recovery.
Some economists warn, for example, that weakness in Europe’s
economies combined with the ongoing appreciation of the dollar
against the euro could hurt American exports.
“You are seeing the combined impact of three distinct yet
reinforcing factors: greater understanding and concern about the
structural headwinds facing markets, a downward reassessment of
global growth prospects, and large technical unwinds,” said
Mohamed A. El-Erian, chief executive of the bond giant Pimco.
Major American industrial companies whose prospects are
intertwined with that of the global economy took a hit to their
share prices on Thursday. General Electric, for example, traded
almost 6 percent lower, Caterpillar shares were down 4.5 percent
and Boeing was off almost 5 percent.
The S.&P. 500 index broke below its 200-day moving average.
To technical analysts of the stock market, that was seen as a
sure signal of a bearish mood among investors.
“There is no sector that is being spared,” said Anthony
Conroy, head equity trader at BNY ConvergEx Group. “You have
heard the phrase ‘flight to quality’? We are having a flight to
liquidity. Everybody is trying to get liquid. Gold, oil, silver,
financials — every sector is getting hit.”
Mr. Buiter of Citigroup said many big investors were
questioning whether they could continue to rely on the euro as a
safe long-term investment, given Europe’s troubles.
“Many pension funds and other long-term holders have to, for
regulatory reasons, hold a fraction of their investments in safe
assets. Euro debt used to fit the bill,” he said. “It no longer
does. People are wondering about it.”
But some other investors said that despite the market
correction there had not yet been a fundamental shift in
long-term investment strategies.
Justin Urquhart Stewart, investment director at Seven
Investment Management in London, said: “The market is nervous and
there has been some selling out, but it’s not capital flight. The
euro zone economy is doing better than it was, German exports are
strong and corporate earnings are on the up. We have had a
one-year bull market in equities, so it’s not surprising to see a
pullback.”
