The turmoil of last week returned with a vengeance as investors dumped stocks of companies that would suffer if worldwide growth slowed and the United States, in particular, broached another recession.
But the declines began in Asia and in Europe, where an unidentified bank had resorted to borrowing from the European Central Bank, hinting of strains in the banking system that some fear could ripple to the United States. Europe’s chronic debt problem continues to plague the Continent’s banks because so many of their assets are invested in the region’s troubled countries.
Investors rushed into United States Treasuries as a safe haven, despite unease about how the government will address its deficit and economic slowdown. Bond prices rose and the yield on the 10-year bond fell below 2 percent for the first time since at least the early 1960s.
The Dow Jones industrial average fell 419.63 points on the day, or 3.7 percent, to 10,990.58. The Standard Poor’s 500-stock index dropped 4.5 percent to 1,140.65. The technology-laden Nasdaq composite fell the most, ending down 5.2 percent at 2,380.43.
Gold rose along with Treasuries as investors sought safety. Oil prices fell on expectations that demand would be tempered in a slowdown.
The S. P. 500 has now fallen more than 16 percent from its April 29 peak. It is once again near bear market territory, defined as a fall of 20 percent.
Analysts said the fear stalking markets was not going away. “We took a little break for a couple days, and it is reinstating itself and I just think that this should probably be expected,” said Nick Kalivas, an analyst at MF Global in New York.
After the sell-offs in Asia and Europe on Thursday, stock prices opened lower in the United States on a spate of dismal economic data. Consumer prices suggested inflation was picking up, and jobless claims rose, defying hopes that the nation’s high unemployment rate might slide.
The big stock plunge, though, came around 10 a.m., when the Federal Reserve Bank of Philadelphia reported a sharp drop in regional manufacturing activity in its monthly survey, deepening worries that the economy may dip back into recession.
That report came a day after Morgan Stanley lowered its forecasts for both worldwide and domestic economic growth, partly because it expected cuts in government spending in Europe and the United States to damp recoveries. It described the United States and the euro area as “hovering dangerously close to a recession” and said it would not take much in the form of additional shocks to tip the balance.
The yield on 10-year Treasury bonds dropped to 1.97 percent on the Philadelphia Fed news before recovering to close at 2.07. According to data from Bloomberg, that low during the day was the lowest yield since at least 1962. Global Financial Data, a supplier of historical financial and economic statistics, said it was the lowest since 1950.
“What freaked me out today was that Philly Fed number,” said James W. Paulsen, chief investment strategist for Wells Capital Management. “That was the first number that says recession.”
That sentiment was echoed by Eric Green, an economist at TD Securities. “When you have an economy operating at stall speed facing these headwinds, it does not take much to tip it over the edge,” he said. “You read a report like this and you think we are going over the edge.”
Credit Suisse said in a note that if the Philadelphia numbers proved a national barometer, and that was unknown, “then a recession likely began in August.”
The latest worries about Europe’s banks flared after an unnamed lender tapped an emergency borrowing program, which was established by the European Central Bank to ensure that firms had ample money in dollars.
The bank borrowed $500 million, a relatively modest sum. But it was the first time a bank had turned to the special program since February, and it set off worries that at least some banks might be struggling to find dollars to finance their operations.
Regulators and bank executives played down the possibility that it could lead to a repeat of the 2008 financial crisis, when credit markets froze virtually around the world.
Eric Dash, David Jolly, Jack Ewing and Bettina Wassener contributed reporting.
Article source: http://www.nytimes.com/2011/08/19/business/daily-stock-market-activity.html?partner=rss&emc=rss