Anxiety About the Economy Sends Stocks Down Sharply

The markets in the United States opened sharply lower and continued to slide, with the broader market as measured by the Standard Poor’s 500-stock index down more than 4 percent within the first hour and 3.9 percent before noon. The Dow Jones industrial average was down 423.41 points, or about 3.7 percent, and the Nasdaq was down more than 4 percent. Major indexes in Europe were down 4 to 6 percent.

Financial stocks were down 4 percent after declining as much as 5 percent earlier. Energy stocks, industrials and other key sectors were also sharply lower.

The yield on the Treasury’s 10-year note fell below 2 percent to a record low as investors turned to the safety of fixed-income securities.

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.

The Vix index, a measure of stock market volatility, jumped sharply. It rose by about a third to around 42 points. The measure, sometimes called the fear index, had risen during the turmoil last week but had eased over the past few days to around 31.5 points.

In a measure of how skittish investors are, there was alarm on Wednesday 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 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 reported on Thursday that United States regulators are scrutinizing whether European banks will be able to continue funding themselves. The report cited people familiar with the matter.

“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 counsel 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.”

Economic reports issued after the markets opened in New York accelerated the decline that had originated in the markets in Europe.

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.

At the same time, 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 total sales, which were the weakest in 13 years.

In another report, the Labor Department said consumer prices rose in July at the fastest rate in four months.

There is “ little support in the data for the Fed’s statement last week that ‘recently, inflation has moderated,’ ” RDQ Economics said in a research note.

Graham Bowley and Jack Ewing contributed reporting.

Article source: http://www.nytimes.com/2011/08/19/business/daily-stock-market-activity.html?partner=rss&emc=rss