Stocks sank, dragging a gauge of global equities into a bear market, Treasury 10-year yields slid to a record low and the Dollar Index rose to a seven-month high amid concern central banks are running out of tools to prevent a recession. Commodities erased gains for the year.
The MSCI All-Country World Index plunged 4.5 percent at 4:39 p.m. New York time and is down 22 percent from its May peak, while emerging-market stocks tumbled the most in almost three years. The Standard & Poor’s 500 Index lost 3.2 percent to 1,129.56 after briefly falling below its 2011 closing low. The Dow Jones Industrial Average slid the most over two days since 2008. Ten-year Treasury yields lost as much as 16 basis points to 1.6961 percent. The Dollar Index rose 1.4 percent.
The Federal Reserve said yesterday it saw “significant downside risks” in the economy and it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth as the recovery falters. China’s manufacturing may shrink for a third month, U.S. jobless claims topped estimates and euro-area services and manufacturing output contracted for the first time in more than two years, reports showed.
“The storyline is that global growth is decelerating,” Mike Ryan, the New York-based chief investment strategist at UBS Wealth Management Americas, said in a telephone interview. His firm oversees $774 billion. “Financial stresses are rising and policymakers are finding few viable options to stabilize the real economy.”
The MSCI global index of developed and emerging-market stocks joined gauges of European and developing-nation equities in entering a so-called bear market, typically defined as a drop of at least 20 percent from a peak. The only developed markets out of 24 that aren’t in bear markets are the U.S., the U.K., Canada, Singapore and New Zealand. The S&P 500 is down 17 percent from a three-year high at the end of April.
The world is on the eve of the next financial crisis, with sovereign debt at its epicenter, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., which runs the biggest bond fund. The European Central Bank hasn’t put in place a “circuit breaker” to contain the region’s debt crisis, El-Erian, who is also Pimco’s co-chief investment officer, said at an event in Washington today.
The Dow average plunged 391.01 points, or 3.5 percent, to 10,733.83 and lost 5.9 percent in two days for its steepest decline since December 2008.
Commodity Shares Lead
Gauges of raw-material and energy producers lost more than 5 percent and industrial companies slid 3.8 percent to lead losses among all 10 industry groups in the S&P 500, with Alcoa Inc., Chevron Corp. and Caterpillar Inc. falling at least 4.4 percent. FedEx Corp., operator of the world’s biggest cargo airline and considered a proxy for the global economy, tumbled 8.2 percent in its biggest drop since March 2009 after cutting its full-year profit forecast amid falling demand in the U.S. and Asia.
The S&P 500 extended this week’s slump to 7.1 percent and dipped as low as 1,114.22, below its lowest closing level in more than a year. The index lost 2.9 percent yesterday after the Fed’s statement and as Moody’s Investors Service cut its long-term credit ratings on Bank of America Corp. and Wells Fargo & Co., saying U.S. support has become less likely if lenders get into financial trouble. Citigroup Inc.’s short-term rating also was downgraded by Moody’s.
“We’re seeing orderly selling,” Ryan Larson, head of U.S. equity trading at RBC Global Asset Management Inc. in Chicago, wrote in an e-mail. “While the headlines and tone remain very much negative, the panic is not setting in.” Larson said he was watching the 1,101 level on the S&P 500, which marked the 2011 intraday low on Aug. 9. “You might see panic set in if that level fails to hold.”
The S&P 500 Financials Index slumped 3 percent, extending this week’s decline to 11 percent and sinking to the lowest level since July 2009. JPMorgan Chase & Co., Bank of America and Citigroup lost at least 3.5 percent today and traded at their lowest prices since 2009.
The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock-option prices, surged 11 percent to 41.35. Volatility gauges in Europe and Asia also climbed.
The S&P 500 may drop as low as 1,076 before investor panic abates and stocks rally, according to Tom DeMark, the creator of indicators for identifying turning points in securities. The benchmark index may reach that level intraday as early as next week and then gain as much as 20 percent, DeMark said in a telephone interview from Phoenix today. The swings will push the VIX above the high of 48 it reached on Aug. 8, he said.
U.S. equities remained lower after a Conference Board report that showed the index of U.S. leading indicators increased more than forecast in August, pointing to a faster pace of growth heading into next year. Applications for jobless benefits fell 9,000 in the week ended Sept. 17 to 423,000, the Labor Department said. Economists forecast 420,000 claims, according to the median estimate in a Bloomberg News survey.
“The market is finally coming to understand that there’s only so much the Fed can do for the economy,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in a Bloomberg Television interview.
Treasury 30-year bonds rallied, pushing yields down the most over two days since the depths of the financial crisis almost three years ago. Yields on 30-year bonds decreased 20 basis points, or 0.20 percentage point, to 2.798 percent and fell as much 44 basis points over two days.
The Stoxx Europe 600 sank 4.6 percent today as all 19 industry groups declined at least 2.2 percent. The regional index has tumbled 26 percent from its high for the year. Mining companies and automakers led today’s retreat. Among national indexes, the U.K.’s FTSE 100 Index, France’s CAC-40 Index and Germany’s DAX slid more than 4.6 percent.
European banks slumped 5.8 percent as a group, falling to the lowest level since March 2009. Dexia SA and Lloyds Banking Group Plc sank more than 10 percent. The biggest risk to the euro area is a run on southern European banks, said Kenneth Rogoff, a former chief economist at the International Monetary Fund, Handelsblatt reported.
The cost of insuring sovereign bonds jumped across Europe with credit-default swaps on France and Germany surging to records. Contracts on Germany rose 13 basis points to 109, swaps on France jumped 16 to 205 basis points and Belgium, Italy and Spain also reached records, according to CMA prices at 5 p.m. in London. The Markit iTraxx SovX Western Europe Index of debt swaps on 15 governments climbed eight basis points to an all-time high of 362 based on closing prices.
A composite index based on a survey of purchasing managers in euro-area services and manufacturing industries fell below 50, indicating contraction, for the first time since July 2009, Markit Economics said in an initial estimate. The index fell to 49.2 this month from 50.7 in August, a deeper slide than the drop to 49.8 that economists had forecast, according to the median of 17 estimates in a Bloomberg survey.
“We have negative headwinds that are absolutely massive,” Patrick Legland, the Paris-based head of research at Societe Generale SA, said in a Bloomberg Television interview with Francine Lacqua in London. “There’s a very powerful slowdown and maybe a recession for Europe and the U.S.”
‘Bailing Out of Risk’
The Dollar Index, which tracks the U.S. currency against those of six trading partners, advanced to 78.39, the highest level since February. The 17-nation euro pared losses against the yen, trading down 1 percent after depreciating as much as 1.5 percent to the lowest level since June 2001. The euro sank 0.7 percent to $1.3472 and slid as low as $1.3385, the weakest level since January versus the dollar.
“The euro zone is in meltdown and investors are bailing out of risk wherever they can,” said Steven Barrow, head of research for Group of 10 currencies at Standard Bank Plc in London, referring to yesterday’s statements by the Fed and the Bank of England. “The fact that the Fed delivered no more than the market expected was probably seen as a disappointment.”
The Australian dollar slid below parity with its U.S. peer for the first time in more than six weeks, falling as much as 3.5 percent. New Zealand’s dollar sank 2.6 percent against the U.S. currency as a report showed the economy almost stalled in the second quarter, reinforcing the case for central bank Governor Alan Bollard to maintain record-low interest rates until 2012.
The S&P GSCI index of 24 commodities fell 4.9 percent, the biggest plunge since May, to leave it down 3.9 percent for the year. Copper plunged to a one-year low, losing 7.3 percent to $3.4885 a pound. Silver plunged 9.6 percent. Oil tumbled to a six-week low, sliding 6.3 percent to $80.51 a barrel after dipping as low as $79.66.
The MSCI Emerging Markets Index sank 6.3 percent, the most since November 2008. Indonesia’s Jakarta Composite Index slumped 8.9 percent, the biggest loss since October 2008, and Russia’s Micex tumbled 7.8 percent for its worst plunge in two years. The Shanghai Composite Index slid 2.8 percent after the manufacturing gauge declined and the government said it will broaden taxes levied on resources.
Manufacturing in China, the world’s largest metals user, may shrink for a third month in September, according to a preliminary index of purchasing managers from HSBC Holdings Plc and Markit Economics released today. The initial reading for this month was 49.4 compared with a final 49.9 for August and 49.3 for July. Figures below 50 signal a contraction.