March 8, 2021

Stocks End Sharply Lower Amid Fears About Europe

After sweeping declines on Monday were followed by huge gains on Tuesday, stocks on Wall Street finished steeply lower on Wednesday as each of the three main indexes dropped more than 4 percent. Wednesday’s trading completely wiped out the gains of the previous day in the broader market as measured by the Standard Poor’s 500 index.

The last time there were three consecutive days of 4 percent moves on the SP was in October 2007.

In the United States, the financial sector again took a beating, shedding more than 7 percent.

Analysts said a variety of worries have clouded the markets in recent weeks, but on Wednesday they singled out fears about exposure to French banks as a factor as shares in those institutions dropped during European trading. The concern is whether big countries like France in the heart of Europe might now be called upon to bail out their own banks as well as economies like Spain and Italy.

“Today it’s fears about French banks and France,” Michael Gapen, United States economist at Barclays Capital in New York, said, singling out the French bank Société Générale, whose shares fell about 18 percent. “SocGen is the name that is really driving trading.”

The plunge on Wall Street on Wednesday, a day after the biggest daily gain in the Dow and Standard Poor’s 500 index since March 2009, drove home a powerful message to investors: For now, at least, in this market, a rally has no basis to last.

Stocks on Tuesday had turned around, racing up after Monday’s steep declines, in response to a Federal Reserve announcement that, while it would not be coming to the rescue with some new program to stimulate the economy, it would leave rates low until the middle of 2013.

“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.

In recent weeks, investors have been focused, to varying extent, on factors including the Standard Poor’s downgrade of the United States credit rating; weak data related to the United States economy; and contagion fears related to the euro zone’s fiscal problems. Some said that the market was already unsettled, and that the downgrade and the debt ceiling negotiations that preceded it made things worse, or that the downgrade had already been priced in by the market but added another layer of uncertainty over how the domestic and global economies would be affected.

For its part, the Fed is hoping that its statement, which three of the 10 members of the Federal Open Market Committee voted against, will encourage investment and risk-taking by keeping the cost of borrowing extremely low until at least mid-2013. Still, it suggested that the United States monetary authorities are now adopting the same policy pursued by the Bank of Japan over the last decade with marginal effect.

“It has been a very eventful two-week period,” said Robert S. Tipp, managing director and chief investment strategist for Prudential Fixed Income.

“What the markets began to digest though with the downgrade, and have continued to chew on with the Fed’s announcement yesterday, is the fact that the economy really is in much worse shape than most people realized,” Mr. Tipp said.

He said those developments have “taken the wind out of the sails of the equity market” and pushed yields lower.

On Wednesday, the Dow was down 519.83 points, or 4.6 percent, at 10,719.94. The Standard Poor’s 500-stock index fell 51.77 points, or 4.42 percent. at 1,120.76. The Nasdaq were was down 4.09 percent, or 101.47 points, at 2,381.05.

The action in government bonds highlighted where investors were calculating their priorities. Even after the credit rating downgrade, the flight from risky assets heated up, with a rise in 10-year government bonds prices rose. Yields declined to 2.14 percent from 2.25 percent on Tuesday, when the yield also reached fell to 2.03 percent.

“It is rivaling the lows hit at the end of ’08,” said Mr. Tipp, referring to the yield. “You are basically at historic lows here.”

Bruce Bittles, the chief investment strategist for Robert W. Baird Company was watching what he described as “waterfall” declines on the monitors following the stock market on Wednesday. He said the debt ceiling problems and downgrade by the S.P. set off underlying market-moving concerns about another recession that had already existed, as well as worsened the uncertainty about what further action the government and central bank could take.

“The government has used up a lot of bullets,” he said, “And the problem is its global in nature.”

The markets now need to see corrective government policy action on the fiscal and debt problems, he added.Gold, a traditional safe haven, surpassed $1,800 an ounce at one point during the day. And the VIX, a measure of the fear in the markets, sharpened to 42.9 from its level of 35 on Tuesday.

On Wednesday, Asian markets drew from the strong rally on Tuesday in the United States and rose but European shares fell back.

The Tokyo benchmark Nikkei 225 stock average rose 1.2 percent. The main Sydney market index, the S. P./ASX 200, gained 2.6 percent. In Hong Kong, the Hang Seng index rose 2.5 percent, and in Shanghai the composite index added 0.9 percent.

The FTSE 100 Britain closed at 5,007.16, down 157.76 points, or 3.05 percent. The DAX Germany closed at 5,613.42, down 303.66, or 5.13 percent. The CAC 40 France closed at 3,002.99, down 173.20, or 5.45 percent.

The downturn in Europe was led by banking shares. French banking stocks dropped amid rumors that a downgrade of France’s AAA credit rating was imminent, but the agencies and the French government have said France is not in danger of a downgrade.

In addition to the decline in the French bank Société Générale, its rival BNP Paribas fell more than 9 percent. Intesa Sanpaolo, the Italian lender, fell almost 11 percent.

Laetitia Maurel, a spokeswoman for Société Générale, said the bank’s fundamentals remain strong, with a first-half 2011 net profit of 1.663 billion euros, even after booking losses for its share of the Greek rescue.

Graham Bowley, David Jolly and Bettina Wassener contributed reporting.

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