Markets resume their retreat

August 10, 2011

Wall Street plunged further into the red Wednesday, erasing the previous day’s dramatic gains as investor worries intensified over the European debt crisis and the health of the global banking system.

The Dow Jones industrial average ended the day down 520 points, or 4.6 percent, putting the blue-chip index back below the 11,000 level and at its lowest point since September 2010. The Standard & Poor’s 500, a broader market measure, ended the day down 52 points, or 4.4 percent, while the Nasdaq, a more tech-heavy index, was down 101 points, or 4.1 percent.

The losses wiped out the previous day’s rise for the Dow, which had rallied nearly 4 percent Tuesday. All three indexes are now solidly in negative territory for the year, with the S&P and the Nasdaq off more than 10 percent.

The losses extended to Asian markets early Thursday. Tokyo’s blue-chip Nikkei 225 index ended its morning session down 1.3 percent.

Markets are likely to be “subject to the vicissitudes of short-term trading gyrations” in the days and weeks ahead, said Kevin Caron, market strategist at Stifel Nicolaus in Florham Park, N.J. That’s because, absent any economic good news, long-term investors will continue to stay on the sideline, Caron said.

Good news could be a long way coming: The weak economic outlook was confirmed by a gloomy report from the Federal Reserve, while in Europe the worsening debt crisis has raised questions about the global banking system.

“You can look around the world and just point out reason after reason why we have problems,” said Richard Stuttmeier, chief market strategist for the Florida stock screening company Valuengine.

At issue is whether big, global banks based in the United States — such as Goldman Sachs, Morgan Stanley or J.P. Morgan Chase — could take a hit if any of their European trading counterparts go under.

“It’s kind of like a chain,” said Scott Valentin, financial sector analyst at the investment bank Friedman, Billings & Ramsay in Arlington County. “If one link breaks in the chain, the whole chain kind of falls apart.”

These financial links were brought into question Wednesday when Societe Generale, a large French bank, shed 15 percent of its value on rumors it might have to take a bigger-than-expected hit from the Greek bailout plan. The bank issued a statement in which it “categorically and vigorously” denied the rumors, but the fears still spread to the United States, where investors sold off big financial stocks.

Smaller, regional banks are also taking a hit, Valentin said, because investors are worried about their future profitability. Those banks make money by borrowing short-term and lending the money at a higher rate over the long-term. But with investors buying up 5-, 10- and 30-year Treasurys and sending their yields lower, it is becoming harder for banks to make money because many of their loan rates are benchmarked on the falling Treasury rates.

Investors continued to buy into longer-term Treasury bonds on Wednesday, sending their yields down to 2.09 percent. That’s down from 2.25 percent Tuesday and more than 3.3 percent at the beginning of the year. A lower yield indicates investors are willing to accept a smaller return in exchange for the safety of holding government bonds.

Other safe bets also rallied. Investors bought up gold futures, sending the precious metal up to $1,782 per ounce.

Oil climbed modestly, with crude futures edging up 2.9 percent to $81.58.

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