March 1, 2021

U.S. Stocks Resume Their Slide After a One-Day Rally

The sharp declines of more than 3 percent on the Dow and two other main indexes in less than an hour after the opening bell on Wednesday sent a message to investors: That the rally of about 4.7 percent in the broader market on Tuesday had no basis to last. Stocks had surged after the Federal Reserve announced that while it would not be coming to the rescue with some new program to stimulate the economy, it would leave interest rates unchanged for a couple of years.

But the rally stalled Wednesday morning. As it had been in recent weeks, market sentiment was shaken by the confluence of events that had plagued it, including the Standard Poor’s downgrade of the United States credit rating, weak data related to the United States economy, and the euro zone’s fiscal problems.

As the flight from risky assets heated up, 10-year government bonds prices rose. Yields declined to 2.14 percent from 2.25 percent on Tuesday.

“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.

By midmorning the Dow was down 410 points, or 3.65 percent. The Standard Poor’s 500-stock index lost 41.33 points, or 3.52 percent, and the Nasdaq composite index was off 80.09 points, or 3.23 percent.

Financial stocks, in particular, were trading lower, down by about 6 percent.

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.

The Fed’s pledge to hold short-term interest rates near zero for at least two more years to support the faltering United States economy “has helped to stabilize sentiment in equities and other risky asset markets — at least for now,” analysts at Standard Chartered wrote in a research commentary. However, they added: “The heavy emphasis on downside risks to growth suggests the pendulum of investor sentiment can quickly rotate back to a more risk-averse stance in coming days.”

The strong rally on Tuesday in the United States had spilled over when Asian markets opened on Wednesday but then lost steam when the baton was passed to Europe.

Stocks turned sharply downward in European afternoon trading, led by banking shares. French banking stocks dropped amid rumors that a downgrade of France’s AAA credit rating was imminent, though none of the major ratings agencies has recently signaled that such a move was on the horizon. The French bank Société Générale fell about 18 percent, while 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, declined to comment on the share price decline, but 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. “The market seems to fear a global recession, but I don’t think that’s going to happen,” Valérie Cazaban, a fund manager at Stratège Finance, said. “Emerging markets are still strong and the United States, though manufacturing is weakening, should avoid returning to recession.”

“For the short term, I think we’ve seen the worst for stocks,” she added. “Valuations are very low considering companies’ profitability and balance sheets. Volatility will stay high, but stock prices aren’t far from their lows.” Still, she said, governments and central banks, having ruled out further fiscal stimulus, have no tools other than liquidity injections left to address the ongoing crisis, meaning that “over the longer term, considering the possibility of inflation, we may not have such a brilliant future. We’ll still have problems left to deal with.”

President Nicolas Sarkozy of France returned from vacation on the French Riviera to meet with officials, including his finance minister and the governor of the Bank of France, on what his office called “the economic and financial situation.”

David Jolly and Bettina Wassener contributed reporting.

Article source: http://www.nytimes.com/2011/08/11/business/daily-stock-market-activity.html?partner=rss&emc=rss

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