Stocks Down Over 4% in Global Sell-Off

Stock market indexes in the United States and Europe dropped more than 4 percent as Japan intervened to weaken its currency and the European Central Bank began buying bonds to try to calm markets.

At the close, the Standard Poor’s 500-stock index was down 60.27 points, or 4.78 percent, to 1,200.07. The Dow Jones industrial average was off 512.76 points, or 4.31 percent, to 11,383.68, and the Nasdaq was down 136.68, or 5.08 percent, to 2,556.39.

It was the biggest percentage drop since February 2009.

Following accelerating falls over the last two weeks, the stock market is now officially in “correction” territory, defined as a drop of 10 percent to 20 percent since the latest peak.

The S.P. 500 has fallen 12 percent since its recent high of 1,363.61 on April 29, underlining the new negative investment sentiment about the economy and Europe.

“We are now in correction mode,” said Sam Stovall, chief investment strategist at Standard Poor’s. “We could have another couple of weeks to go before it bottoms.”

The last time the market was in a correction was last summer, when it fell 16 percent before recovering.

A fear haunting markets is that the United States economy may be heading for a double-dip recession. And even after a second major rescue package for Greece and the agreement to raise the debt ceiling in the United States, investors are concerned that world leaders have not done enough to address fragile underlying economic growth, while Europe’s debt problems have moved on to the much bigger economies of Italy and Spain.

Mohamed El-Erian, chief executive of the bond giant Pimco, said investors were selling risky assets like stocks “globally prompted by concerns about the weakening economic outlook, spreading contagion in Europe and insufficient policy responses.”

With Thursday’s dive, the three major American indexes had erased all of the gains made so far in 2011, with the S.P. and Nasdaq markedly below the start of the year.

The Dow, an index of 30 blue-chip stocks, was about 11.1 percent off of its most recent closing high of 12,810.54, reached on April 29. But it was 19.6 percent below its all-time high of 14,164.53, on Oct. 9, 2007.

Since the beginning of 2008, there have been 17 days with drops of 4 percent or more — 13 in 2008 and 4 in 2009.

Unnerved by policy makers’ apparent inability to get ahead of Europe’s festering debt crisis, European stock markets turned sharply negative across the board.

In Britain, stocks closed down 3.43 percent. In Germany, the DAX index dropped 3.4 percent. In France, the CAC 40 closed down 3.9 percent.

“This is the worst it has been in Europe,” said Jens Nordvig, currency economist at Nomura Securities in New York. “The current rescue package was not enough to cope with the size of the problems posed by Italy and Spain. We need a new framework that can cope with those two countries, and without it markets are on their own and are falling.”

Major indexes in Italy, Spain, France and Switzerland all closed Thursday more than 20 percent below their 2011 highs, while Germany was off nearly 15 percent and Britain’s decline was more than 11 percent.

The selling has extended to many other markets. Mexican stocks are off almost 14 percent from their highs earlier this year, and Brazil’s major index has lost more than a quarter of its value.

Yields on Italian government bonds, already above 6 percent, rose sharply, adding to concerns that the nation’s current debt position is unsustainable. Yields on Spanish debt also increased. This was despite large-scale intervention by the European Central Bank, which for the first time since March began buying bonds in an apparent attempt to prevent the region’s sovereign debt crisis from engulfing Italy.

The markets had expected some concrete action from Prime Minister Silvio Berlusconi on Italian’s worsening debt situation in public remarks late Wednesday. But they were disappointed when he defended the country’s fundamentals and said current packages were enough to foster economic growth. The Italian stock market opened up but then slipped sharply.

Since many of Europe’s banks hold the bonds of countries like Italy and Spain, concern is turning to the health of the banking system as these bonds drop in value. With warning signs flashing that some European banks are struggling to fund themselves in increasingly expensive credit markets, the E.C.B. also moved to help weaker banks by expanding its lending to institutions in the euro area at the benchmark interest rate. Bank stocks nevertheless fell sharply in Europe.

Jean-Claude Trichet, the president of the E.C.B., said the bank had acted in response to “renewed tensions in some financial markets in the euro area.”

He said that uncertainty created by the debate in the United States to raise the debt ceiling had unnerved European markets as United States investors had become increasingly reluctant to lend to European banks. “It’s clear the entire world is intertwined,” he said. “What happens in the U.S. influences the rest of the world.”

But the E.C.B.’s steps were not enough to help Europe’s bond markets.

Laurent Bilke, an analyst at Nomura in London, said the E.C.B. had been buying government debt of Portugal and Ireland in order to calm these markets. But it had not been buying Italian and Spanish government debt, and that had unnerved investors.

He said the E.C.B. council had also not been united in its decision to take extraordinary measures to intervene in the markets, and that fact had spooked markets.

Article source: http://www.nytimes.com/2011/08/05/business/markets.html?partner=rss&emc=rss