After the rebound in the markets a day earlier when the Federal Reserve promised to keep interest rates near zero for two years, investors appeared to pay closer attention to the Fed’s grim assessment of the prospects for the economic recovery and jobs growth.
Investors fled any form of risk and poured into safe-haven investments like Treasury securities and gold, resuming the trend of the last few weeks. Confidence was shaken in the financial health of some of Europe’s banks and what their problems might mean for banks in the United States. Bank stocks led the sell-off in the United States, shedding nearly 7 percent.
Most European markets have entered bear territory, dropping more than 20 percent from recent highs, and the S. P. 500-stock index is not far behind, lopping off 18 percent since its recent April 29 peak.
Meanwhile, signs of stress are emerging in the short-term financing markets in Europe, where banks borrow billions of dollars everyday from one another and other lenders to finance loans and investments.
Although borrowing costs for banks in the United States and Britain have risen modestly, those for European banks that lend dollars to one another have doubled in the last 10 days to their highest level in the last two years. Still, borrowing costs are roughly one-fourth of where they were during the peak of the financial crisis.
On Wednesday, concerns about Europe’s debt crisis swirled across trading floors in New York. For yet another day, the stock market swung back and forth with ranges of hundreds of points. Stocks tried a late afternoon rally, only to plunge anew toward the close.
They finished steeply lower on Wednesday as each of the three main indexes dropped more than 4 percent, generally wiping out the gains of the previous day.
The last time there were three consecutive days of 4 percent moves in the S. P. was in October 2007.
The Standard Poor’s 500-stock index lost 4.4 percent to close at 1,120.76. The Dow Jones industrial average ended down 519.83 points, or 4.6 percent, at 10,719.94.
Few are risking a prediction that the market has hit a bottom. It will take a strong dose of rosy economic reports to start to pull stocks up. But instead of being buoyed by positive sentiments, investors are increasingly worried that governments in the United States and in Europe are unable to solve economic problems that may now be getting out of hand.
The fear is that policy makers have few weapons left to reignite growth now that United States interest rates have been pushed close to zero and any fiscal stimulus appears to be off the table in Washington.
“The market psychology is such that investors no longer seem to know who or what to root for, and all that they do know is, according to the Fed, that rates will remain low until the middle of 2013,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.
As Europe’s debt crisis has spread into nations at the heart of the euro zone like Italy and France, it has added a new level of anxiety to markets. There are concerns that France could be overwhelmed if it is called upon to participate in any support for heavily indebted nations like Spain or Italy, and also bail out some of its own banks that hold large amounts of government debt from those shaky countries.
Some French bank stocks fell sharply after there were signs of some stress in bank funding rates in Europe.
Borrowing costs for European banks that lend to one another have doubled to 60 basis points since the end of July, although that is still well below the nearly 200-basis-point level hit at the height of the financial crisis.
Nevertheless, banks were the hardest hit sector in the United States stock market over fears of how vulnerable they are to the troubles in Europe.
Article source: http://feeds.nytimes.com/click.phdo?i=348a68f6672d77c3bda1255f9cfa5ce5
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