Stock prices tumbled Wednesday, led downward by some of the world's biggest banks. But bond investors offered a potentially more ominous assessment of prospects for the global economy, pouring money into the safety of U.S. Treasury bonds despite yields that are near their lowest levels in history.
The Dow Jones Industrial Average fell 519.83 points, or 4.62% to 10719.94, more than wiping out the gains posted in Tuesday's sizable late-day rally. It was the Dow's fourth triple-digit move in five days and brings its declines since its April peak to more than 16%. The index is less than 500 points away from officially being in a bear market, defined as a decline of 20%.
Asian shares Thursday morning moved lower. Japan's Nikkei Stock Average fell 1.6%; Australia's S&P/ASX 200 lost 1.4%; South Korea's Kospi Composite dropped 1.8% after slumping over 4% at the opening; and New Zealand's NZX-50 was 0.1% lower.
The Dow Jones Industrial Average plunged to an 11-month low as investors were squeezed between fears of further contagion among European banks and the Federal Reserve's gloomy economic outlook. Paul Vigna has details.
In Europe, rumors swirled about the health of French banks and the possibility that France could lose its AAA credit rating as the country's borrowing costs rise. The main indexes for stock markets in France, Germany, Spain and Italy each shed more than 5% of their value.
The market gyrations and clear worries about the health of the U.S. and European economies sparked a volley of phone calls between senior administration officials, including President Barack Obama and Treasury Secretary Timothy Geithner, and European leaders. Mr. Geithner and Federal Reserve Chairman Ben Bernanke also met with President Obama Wednesday, but no new steps were announced to address the market volatility.
Meanwhile, the Federal Reserve Bank of New York has been calling banks with increased frequency amid the recent market tumult to ask them about the volatility in their stock prices, as part of their ongoing effort to monitor the situation, according to people familiar with the conversations.
In the Treasury market, bond buyers' bleak economic appraisals were evident in the day's auction of U.S. Treasury 10-year notes: Investors eagerly lent money to the U.S. government at an interest rate of 2.14%, a record low yield for a sale of 10-year notes. The sale suggests investors expect weak economic growth and below average inflation for the better part of the next decade.
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"It tells you that the economy is expected to be weak for a pretty long period and that any rebound we get is probably not going to be very vigorous," said Michael Feroli, chief U.S. economist for J.P. Morgan Chase & Co., of the low-interest-rate environment.
Worries like these have been magnified by the Federal Reserve, which on Tuesday signaled its concerns about slow economic and job-market growth. While stock investors on Tuesday sent prices higher after taking heart in the Fed's comments—specifically that the central bank would use other tools at its disposal to help juice financial markets—investors have since concluded that the Fed's help still might not be enough.
The U.S. economy barely grew in the first half of the year, and now the European economy is under growing strain from its own debt crisis.
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These factors, combined with stock-market chaos, are widening concerns of renewed recessions by depressing business and consumer confidence. Those concerns, in turn, have fed the exodus from stocks and bonds of European countries.
"It's a question of whether you start to have a negative feedback loop," said Laurent Fransolet, head of European fixed-income strategy research at Barclays Capital, where selling pressure begins "feeding on itself."
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The concerns have led to strong demand for Treasurys, despite the downgrade by Standard & Poor's of the U.S. long-term credit rating last Friday. The trend of falling Treasury yields gained steam following the Fed's announcement Tuesday that it would keep interest rates "exceptionally low" though the middle of 2013. Yields on 10-year Treasurys, which fall as prices rise, ended the day at 2.145%, near their lowest on record.
Wednesday's decline in stock prices, with its rumor-driven swings in bank stocks, was the latest in a remarkable string of wild moves in financial markets that harks back to the worst of the financial crisis in 2008.
It marked the fourth day in August that the Dow has closed more than 2% higher or lower. Only one of those sessions, Tuesday's, was a positive move. In contrast, there were only two days with moves of 2% or more in the first seven months of the year.
Stocks wiped out the previous day's gain, with the morning of Aug. 10 starting with sell-offs. The focus is also turning to Europe as questions emerge over France's credit rating. (Photo: AP Photo.)
Amid the turmoil on Wednesday, gold prices surged to yet another record, gaining 2.4% to $1,781.30 per ounce.
There were some winners. Several corporations and other borrowers jumped into the market to take advantage of the tumbling interest rates. Warren Buffett's Berkshire Hathaway Inc. and Procter & Gamble Co. led $9.2 billion in corporate bond sales. Mexico and the University of Southern California both sold bonds that mature in 100 years—an unusual but not unheard-of term—guaranteeing themselves a century of low rates.
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In Europe, the stock selloff focused initially on French banks with heavy holdings of troubled European government debt. At one point, shares of France's second-largest bank, Société Générale SA, were down more than 20% before ending 15% lower on the day.
But by late afternoon, the fears had engulfed most major European banks. At least 11 saw their shares fall 8% or more, a grim sign considering that their stocks generally trade in relatively narrow bands during normal times. Outside France, the day's big losers included giant lenders in Italy, Spain and Germany. Credit Agricole fell 12% and BNP Paribas SA declined 9%.
One particular concern that has bubbled up in recent weeks is that it is getting harder for some banks to secure the funds that they need to run on a day-to-day basis.
Many analysts and other experts agree that the worries about European banks facing short-term liquidity problems are overblown. While it has become more expensive, and in some cases impossible, for some banks to obtain funding from investors or rival banks, lenders from euro-zone countries have a fallback option: the European Central Bank. Banks can tap essentially unlimited loans from the Frankfurt-based ECB, which accepts euro-zone government bonds as collateral.
The European banking worries helped propel U.S. stock prices downward. Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. all fell more than 10%.
U.S. financial stocks have also been hit hard by concerns about their mortgage exposure with the economy weakening and legal challenges piling up, many dating back to practices during the real-estate bubble. The stock price of Bank of America, the biggest U.S. bank in terms of assets, has dropped 17% since American International Group Inc. sued it Monday morning, seeking $10 billion in damages on its purchase of poor-performing mortgage bonds.
—Sudeep Reddy, Serena Ng and Damian Paletta contributed to this article.
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