Major equity indexes fell 2 percent or more, sending the broader market in the United States back into negative territory for the year. Major indexes in Europe fell about 3 percent.
Stocks were lower throughout the session, under pressure from disappointing economic data in Europe, and tumbled sharply late in the session after the prime minister of Greece, George Papandreou, said that his Socialist government would hold a national referendum on the rescue package, raising questions about Greece’s ability to follow through on its part of the hard-won deal to stabilize the euro.
That announcement came after the release of economic data earlier in the day by the European statistics agency that inflation remained well above the European Central Bank’s target level and that unemployment in Europe remained stubbornly high.
Bank stocks were hit particularly hard after the European debt crisis claimed its first American financial institution, MF Global, the brokerage firm run by Jon S. Corzine. MF Global, holding more than $6 billion in sovereign debt of European countries, filed for bankruptcy protection. Citigroup and Bank of America each fell about 7 percent.
The economic data in Europe came at a bad time for Mario Draghi, who will take over as head of Europe’s central bank on Tuesday and will preside over his first policy meeting on Thursday. The bank’s policy committee will face a choice of whether to keep a tight rein on inflation or address rising unemployment and further signs of a looming recession.
As signals of a downturn accumulate, the Organization for Economic Cooperation and Development called on Monday for the central bank to essentially ignore inflation by cutting interest rates to encourage growth.
“The status quo is not acceptable,” Ángel Gurría, the secretary general of the agency, said in Paris as the organization updated its economic forecasts ahead of the meeting of the Group of 20 government leaders in Cannes, France beginning Thursday.
In comments aimed at G-20 leaders, Mr. Gurría called for a bolder response to what the organization said would be “a marked slowdown” in the euro area next year, including periods of declining economic output. Growth in the United States will also remain weak next year, the organization predicted, below the level needed to substantially reduce unemployment.
“Much of the current weakness is due to a generalized loss of confidence in the ability of policy makers to put in place appropriate responses,” the organization said in a statement.
In the United States, the Standard Poor’s 500-stock index fell 31.79 points, or 2.47 percent, to 1,253.30. The Dow Jones industrial average fell 276.10, or 2.26 percent, to 11,955.01 and the Nasdaq composite index was down 52.74 points, or 1.93 percent, at 2,684.41.
“Risk aversion is once again taking hold in markets,” strategists at Brown Brothers Harriman Company said in a market commentary.
The S. P. was down 0.35 percent for the year after Monday’s declines, while the Dow was up more than 3 percent and the Nasdaq 1 percent. Still, the Dow Jones industrial average was up 1,041.6 points in October for its biggest monthly point gain ever.
Treasury instruments surged in a flight to safety.
The Treasury’s benchmark 10-year bond rose 1 26/32, to 100 3/32, and the yield fell to 2.12 percent from 2.32 percent late Friday.
“Although encouraged by what we consider to be a good start, we suspect Europe will require other measures going forward to effectively deal with its sovereign debt problems,” said the U.S.A.A. Investment Management Company in another note.
In Italy, the prime minister, Silvio Berlusconi is under pressure to improve the economy. But Italy appears to be a source of worry for investors about whether the country will be able to service its debt. On Monday, 10-year Italian government bond yields pushed above 6 percent, the highest rate since August. The Euro Stoxx 50 index of euro zone blue chips closed down 3.1 percent, while the DAX in Germany and the CAC 40 in Paris lost about 3.2 percent. The F.T.S.E. 100 in London was down 2.8 percent.
Official data from Europe reinforced the pessimistic economic outlook. Inflation in the 17 European Union countries that use the euro was steady in October at a 3 percent annual rate, according to figures from Eurostat, the European Union’s statistics agency. That was contrary to analysts’ predictions of a slight decline because of slowing economic growth.
Meanwhile, unemployment edged higher, to 10.2 percent in September from 10.1 percent in August, Eurostat said.
The data, along with a muted official forecast for Spanish growth, offer no easy choices for Mr. Draghi, who succeeds Jean-Claude Trichet as president of the central bank.
The Bank of Spain said Monday that the Spanish economy stopped growing in the three months through September, as government austerity measures cut into domestic consumption.
At the same time, inflation remained well above the central bank’s target of about 2 percent. As a result Mr. Draghi, eager to establish his credentials as an inflation fighter, may be hesitant to preside over a rate cut just days after assuming the leadership.
“Our forecast is for the first cut to be delivered this week, but this uncomfortably high headline-inflation reading may make the E.C.B. want to wait until December,” analysts at HSBC wrote in a note to clients.
Unemployment was highest in Spain, at 22.6 percent, and in Greece, at 17.6 percent. Italy recorded one of the biggest jumps in joblessness, to 8.3 percent from 8 percent, as well as one of the biggest increases in inflation, to 3.8 percent from 3.6 percent.
“I think it is a big sell-off — profit-taking after an enormous, ferocious, violent run upward,” James W. Paulsen, chief investment strategist for Wells Capital Management, said in discussing the decline in stocks.
But he also forecast that some of the data to be released this week could restore market attention to the economy in the United States.
“I think Europe is certainly part of the reason” for the down day, he said. “Where we end this week is going to have more to do with the data coming from Main Street, U.S.A.”
In particular, Federal Reserve policy makers hold a two-day meeting that ends on Wednesday, and on Friday the government’s monthly report on the job market is to be released.
On Monday, the Chicago Purchasing Managers Index had a reading of 58.4 in October, meaning business activity in the United States continued to expand, but at a slower pace than in September, when it registered 60.4.
Michael J. de la Merced and Ben Protess contributed reporting.
Article source: http://feeds.nytimes.com/click.phdo?i=168f5cb404e8ed9edb447dfd84dba80c
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