New fears of financial collapse in Italy drove U.S. markets to their worst day in three months Wednesday, as the tenuous situation in Europe again exposed new risks to the global economy and markets in Asia and Europe dropped sharply on Thursday ahead of an Italian bond auction that will be a key test of investor sentiment in the troubled country.
Italy will try to sell $6.8 billion of one-year treasury bills Thursday morning, and it may end up finding buyers only at the interest rates that have spiked in recent days. As of Wednesday evening, one-year Italian debt was trading at 8.4 percent yields on the open market. Just a month ago, Italy sold one-year bonds at 3.6 percent yields — considered a far more sustainable level.
The Dow Jones industrial average ended Wedneday down 389.24 points, a 3.2 percent drop. The broader Standard & Poor’s 500-stock index lost 3.7 percent, and the technology-heavy Nasdaq composite index fell 3.9 percent. European markets were down as well, 2.2 percent by the German Dax index, but had closed by the time the market rout was underway. The price of oil fell 1.1 percent, to $95.74 a barrel.
Asian markets plunged Thursday. Japan’s Nikkei 225 index fell 2.9 percent to close at a five-week low of 8,500.80. Hong Kong’s Hang Seng dived 5.3 percent to 18,963.89. South Korea’s Kopsi fell 4.9 percent and Australia’s S&P/ASX dropped 2.4 percent.
European markets also fell in early trading Thursday. Britain’s FTSE 100 lost 1.4 percent. Germany’s DAX fell 1.8 percent and France’s CAC-40 was 1.8 percent lower. Wall Street was also headed for a lower opening, with Dow Jones industrial futures down 0.1 percent at 11,715 and S&P 500 futures marginally lower at 1,225.40.
Across financial markets, investors were fleeing from anything perceived as risky and plowing money into assets viewed as safe. U.S. Treasury bonds rallied, pushing rates downward. The U.S. government on Wednesday could borrow money for a decade for 1.96 percent, the lowest rate in a month. The dollar strengthened, with an index measuring its value against six other major currencies rising 1.7 percent.
Coming on a day with no major U.S. economic or corporate earnings news, the decline appeared almost entirely attributable to Europe’s crisis, which has metastasized as problems in Greece have spread to Italy.
“Europe is creating enormous volatility, particularly in a week when we have no big new fundamental information on the U.S. economy,” said James Paulsen, chief investment strategist at Wells Capital Management.
Investors dumped Italian debt Wednesday, as Prime Minister Silvio Berlusconi said he would resign and uncertainty reigned over who will come next and whether a new leader could push through reforms needed to maintain international support for Italian debt.
The rate that the country — the third-largest economy in continental Europe — must pay to borrow money for a decade soared to 7.25 percent, from 6.77 percent Monday. That move risks creating a vicious cycle in which higher interest costs render the Italian government’s finances all the more precarious, pushing rates further still.
Without substantial debt reduction, “Italy is going to be engulfed in debt,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “The interest payments will envelop their budget in no time.”
There are a number of linkages through which weakness in Europe — particularly an all-out collapse of the common euro currency — could damage the United States. American businesses export in large volumes to Europe, and declines in the stock market damage the confidence of firms weighing whether to hire or expand.
“Europe is one of the dark clouds hanging over the U.S. economy,” said Ryan Sweet, a senior economist with Moody’s Analytics. Sweet said the troubles in Europe are heightening uncertainty for businesses stateside.
But perhaps more significant than either of those are the links through the financial system — such as U.S. banks that have large exposures to European banks, which in turn have large potential losses on European government debt. The financial crisis of 2008 showed the hard-to-predict ripple effects that can emanate from a single bank failure.
Some of the steepest declines in U.S. stocks were in shares of large, global banks. Morgan Stanley, which investors fear could have significant exposure to Europe, fell 9 percent, to $15.76. J.P. Morgan Chase fell 7 percent, and Citigroup 8.2 percent.
Even as the fears in Europe caused new jitters in the U.S. market, it was the latest in a series of developments that have intermittently sparked bouts of volatility for the past 18 months.
“These developments should not surprise anybody,” Ablin said. “This has been the slowest-moving train wreck on record.”
Michael Birnbaum in Berlin contributed to this report.