Stock markets are walloped by another sell-off as fears of recession build

August 18, 2011

Stock prices plunged in a broad sell-off Thursday amid renewed fears about the finances of countries and banks in Europe in a return of the investor skittishness that led to last week’s wild market swings.

While there was no one trigger for the market plunge, a spate of gloomy numbers and the return of panic selling reawakened fears of another recession.

Bleak numbers for U.S. jobs, housing and manufacturing compounded the anxiety over European woes, rattling share prices in every industry, and indicated again that the economic recovery remains fragile.

All three major stock indexes more than wiped out their gains from earlier this week. For the year, the Dow Jones industrial average is down 5 percent, the Standard & Poor’s 500-stock index is down 9 percent and the Nasdaq composite index is down 10 percent.

The sell-off continued in Asian markets Friday. Japan’s blue-chip Nikkei 225 index ended its morning session down 2.15 percent, and stocks dropped sharply in Seoul, Sydney and Hong Kong.

“I think the risk now is that we fall into another recession,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. “I think the risks have just changed very dramatically in the last couple of months. People are spooked.”

Data from the National Association of Realtors, a trade group, painted a disappointing picture of the housing market, with sales of existing homes falling 3.5 percent in July to 4.67 million, the lowest rate in eight months. Economists had been expecting sales closer to 5 million.

“Just as mortgage rates are dropping, people are not applying to buy homes,” Newport said.

Jobless claims rise

The latest figures on unemployment, considered another key piece in any recovery, also proved disconcerting. The Labor Department said Thursday that weekly unemployment benefits again rose above the 400,000 level last week, a benchmark figure that many economists take as a sign of a declining economic trajectory.

“Right now, it’s all about jobs in the U.S.,” said Kurt Rankin, an economist at PNC Financial Services Group. “Nothing is going to happen in the U.S. until some jobs are created.”

But Rankin and other economists said that what sent stock prices into decline on Thursday had less to do with conditions in the United States, which have been well known, than with signs of worsening conditions in Europe.

The decline in U.S. markets came after sharp sell-offs overnight in Europe. Germany’s blue-chip DAX index tumbled 5.8 percent, Britain’s FTSE 100 fell 4.5 percent, and France’s CAC 40 was down 5.5 percent.

Major European bank stocks ranked among the biggest losers as investors showed their doubts about their health and the continued debt crises on the continent.

The stability of the European banking system has been a persistent concern — one that the International Monetary Fund, the United States and others have encouraged officials in the region to tend to more quickly.

But progress has been slow. The 17 banking systems are overseen by 17 different countries, each with its own problems, such as bad housing loans made by Spain’s “cajas,” or savings banks; the overseas investments of Germany’s regional Landesbank; and an Irish banking system that grew to be several times the size of the country’s economy.

A regional analysis released in July showed that the capital buffers of 21 of 90 banks studied would, in another economic downturn, fall below or close to what was considered a safe level. Some major ones cleared the threshold only narrowly.

Bank investments in government bonds, meanwhile, remain a major source of doubt. Banks in France, Germany and elsewhere now hold tens of billions of dollars of government debt that might not be worth what they paid for it.

The holdings can be sizable. According to data released as part of the stress test, the French bank Societe Generale, for example, holds $2.8 billion in Greek bonds, $4.7 billion in Spanish bonds, $8.8 billion in Italian bonds and nearly $20 billion in French bonds.

In Thursday’s trading, shares of Societe Generale shed more than 12 percent; its peers Credit Agricole and BNP Paribas were each down about 7 percent. In Germany, investors sheared 10 percent off of CommerzBank and nearly 7 percent off Deutsche Bank. Italy’s UniCredit was down 7 percent.

U.S. bank stocks take hit

The slump in European banking led to a similar sell-off in the United States. Shares of Bank of America tumbled more than 6 percent. Other major banks, including Morgan Stanley, Citigroup and Wells Fargo, were down more than 4 percent.

“It’s a harsher day than I would have expected,” said Matthew Czep­liewicz, a banking analyst at Collins Stewart Hawkpoint in London.

He said markets were probably reacting to the lack of progress on Europe’s debt woes rather than speculation about individual banks.

Bank stocks are also being hurt by Europe’s dwindling economic prospects, Czepliewicz said.

This week, the European Union’s statistical office reported only a 0.2 percent rise in gross domestic product, the broadest measure of economic growth, across its 27 member countries in the second quarter.

Of the greatest concern was news that Germany’s GDP had slowed to 0.1 percent growth during the quarter.

“Germany has been the driver of growth over here,” Czepliewicz said.

The S&P 500 closed down about 53 points, or 4.5 percent; the Dow Jones industrials fell nearly 420 points, or 3.7 percent; and the tech-heavy Nasdaq slid more than 131 points, or 5.2 percent.

Jason Schenker, president of Prestige Economics, a forecasting firm in Austin, said the odds of a second recession are 50 percent.

“The data today continues to indicate that the U.S. economy is hobbling along,” he said. “Now we’ve got a much more significant slowdown.”

Staff writer Howard Schneider in Berlin contributed to this report.

Peter Whoriskey is a staff writer for The Washington Post handling investigations of financial and economic topics. You can email him at peter.whoriskey@washpost.com.
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