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Thursday, May 6, 2010

The Dow plunges more than 1,000 points, then bounces halfway back. Greece's parliament votes for the EU-IMF bailout despite intense protests. Moody's warns that the economic crisis could weigh on European banks.

The Dow plunges more than 1,000 points, then bounces halfway back. Greece's parliament votes for the EU-IMF bailout despite intense protests. Moody's warns that the economic crisis could weigh on European banks.

An enormous panic hit the U.S. stock market today, sending the Dow Jones Industrial Average ($INDU) briefly below 10,000 for the first time since November 2009 before the market turned again.

The Dow was down nearly 1,000 points at 9,869.62 at about 2:40 p.m. when it suddenly rebounded. At 3:20 p.m. ET, the Dow was down 472 points, or 4.3% to 10,397. The Dow lost 919 points between 1 p.m. and 2:40 p.m. It dropped as many 998 points on an intraday basis, the largest such decline since 1987.

The Nasdaq Composite Index ($COMPX) had lost 109 points, or 4.6%, to 2,293, and the Standard & Poor's 500 Index ($INX) had shed 50 points, or 4.3%, to 1,116.

The panic hit as traders worried that European financial markets would seize up. But it seemed worsened by a breakdown in the computerized market reporting systems in New York. One issue appeared to be a misprint in the price of Procter & Gamble (PG), which closed Wednesday at $62.12 and suddenly was at $39.37. Then, the stock was quoted at $60.81 at 3:10 p.m.

The selling came despite vote by Greece's parliament to pass the 110 billion euro ($146 billion) European Union-International Monetary Fund bailout package.

Worries that the package won't prevent the crisis from spreading to Portugal and Spain and even beyond overshadowed any optimism from the vote. The euro was plunging against the U.S. dollar, and

Also adding to the day's stress were weaker-than-expected April sales reports from retailers.
 
Greece agreed to the bailout package last weekend, which included strict austerity measures like cuts to public-sector wages, cuts to public- and private-sector pensions and an increase to the value-added tax. Thousands of Greek workers have been protesting the measures in recent days, and three people died.
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Stocks have plunged on worries that the bailout would not be enough to prevent the crisis from spreading across Europe or to prevent Greece from defaulting on its debt.

Moody's Investors Service said that the fiscal crisis in Europe could threaten banks in Portugal, Spain, Italy, Ireland and the United Kingdom. "Each of these countries' banking systems faces different challenges of different magnitudes," Moody's said. But the "contagion risk could dilute these differences and impose very real, common threats on all of them."
    The sell-off pushed the euro lower against the U.S. dollar, and U.S. interest rates dropped. There were worries about a new credit crisis erupting.

    The Dow has fallen about 5.7% since peaking on April 25. The S&P 500 and the Nasdaq are off 7.2% and 8.4% since their peaks on April 24, respectively.

    The declines are not too far off from the January-February decline. The Dow fell 6.7% between Jan. 19 and Feb. 4, with the S&P 500 off 7.6% and the Nasdaq down 8.4%.

    The weakest sectors of the market were financial and energy stocks. Energy shares dropped as crude oil dropped to $77.13 a barrel, down $2.84. Gold was up $22.30 to $1,197.30.

    All of the 30 Dow stocks were lower. Procter & Gamble, ironically, was the best performer, down just 1.4%. Bank of America (BAC), down 8.2% to $16.09 was the Dow laggard. Meanwhile, 58 S&P 500 stocks were showing gains, along with only 10 stocks in the Nasdaq-100 Index ($NDX.X). The index was down 54 points, or 2.7%, to 1,905.

    Fidelity National Information Services (FIS) was the S&P 500 leader, up 14.2% on a report in The Wall Street Journal that the provider of back-office services to financial companies is in talks to be taken private by a group headed by the Blackstone Group (BX).

    Rival Fiserv (FISV) was up 7.4% to $54.71 to lead the Nasdaq-100.

    Apple (AAPL), down 2.2% to $250.38, contributed 6 points to the Nasdaq-100's decline. Apple is down 8.4% since peaking on an intraday basis at $272.46 on April 26.

    Caution about economy weighs on markets
    There wasn't a lot of bullishness about the economy.
      St. Louis Federal Reserve President James Bullard said today that the European debt crisis weigh on a recovery for the U.S. economy.

    "One risk to the outlook . . . is the fallout from potential sovereign debt default as conditions continue to deteriorate in Greece and other countries," Bullard told an audience at Washington University's Olin Business School.

    Federal Reserve Chairman Ben Bernanke also spoke about the economy, although his comments were slightly more upbeat. "Although bank credit remains tight, I see some reasons for optimism," Bernanke said today in a speech in Chicago.

    "Senior loan officers tell us, at least outside of commercial real estate, they anticipate a modest reduction in their troubled loans over the coming year," Bernanke said. "As a result, bank attitudes toward lending may be shifting."

    ECB keeps rates steady
    The European Central Bank kept its key lending rate steady at a record low of 1% this morning, and ECB President Jean-Claude Trichet said that the financial crisis will likely weaken economic growth.

    "We expect the euro area economy to expand at a moderate pace in 2010, but growth patterns could be uneven in an environment of high uncertainty," Trichet said at a news conference.

    Trichet also said that he welcomes the Greek austerity plan but that  the ECB did not discuss buying any government debt at its meeting today. Greece and Portugal are "not in the same boat," Trichet said. He also said that the prospect of a default within the eurozone "is, for me, out of the question."

    The euro fell to a 14-month low against the dollar after the rate announcement, sending the dollar higher. Crude oil was down $2.64 to $77.43 a barrel.
    Initial jobless claims fall
    First-time jobless claims fell by 7,000 last week to a seasonally adjusted 444,000, the Labor Department said this morning, in line with expectations and the third straight week of declines. The report comes a day ahead of the government's April nonfarm payrolls report. Economists are looking for a gain of 185,000 jobs.

    The four-week moving average of initial claims, which takes out weekly volatility, fell by 4,750 to 458,500 last week.
    The Dow Jones Industrial Average posted its biggest intraday loss since the market crash of 1987, the euro slid to a 14-month low and yields on Greek, Spanish and Italian bonds surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. U.S. Treasuries surged.
    The New York Stock Exchange told CNBC that there were no system errors during the Dow’s plunge as speculation of bad trades swirled through the market. The Nasdaq OMX Group Inc. said it is working with other markets to review the plunge.
    “It’s panic selling,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $379 billion. “There’s concern that the European situation might cool down global growth and freeze the credit markets.”
    The Dow average lost as much as 998.5 points, or 9.2 percent, before paring its drop to 383.17 points at 3:40 p.m. in New York. The Standard & Poor’s 500 Index fell as much as 8.6 percent, its biggest plunge since December 2008, before trimming its decline to 3.5 percent.
    European Central Bank President Jean-Claude Trichet held interest rates steady at a record low of 1 percent today and said the bank didn’t discuss whether to purchase government bonds to stem the region’s debt crisis, defying market speculation that he would take such measures. The euro maintained losses even as Greece’s parliament approved austerity measures demanded by the European Union and International Monetary Fund as a condition of its 110 billion euro ($140 billion) bailout.
    Market ‘Horrified’
    “The ECB can fix this instantly by doing what the Fed has done -- instantly providing liquidity by buying bad fixed-income instruments and paying cash in U.S. dollars,” said David Kovacs, head of quantitative strategies at Turner Investment Partners in Berwyn, Pennsylvania, which manages $18 billion. “The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk assets.”
    The MSCI Asia Pacific Index today joined the MSCI World Index and the Stoxx 600 Index in wiping out its advance for 2010. The Dow and S&P 500 briefly erased their yearly gains before paring losses.
    Bank of America Corp., General Electric Co. and Boeing Co. tumbled more than 5 percent to lead declines in the 30-stock Dow average.
    The benchmark index for U.S. stock options surged as much as 62 percent, the most since February 2007, to 40.26. The VIX, as the Chicago Board Options Exchange Volatility Index is known, measures the cost of using options as insurance against declines in the S&P 500.
    Treasury Yields
    Yields on the benchmark 10-year Treasury note plunged 14 basis points to 3.398 percent on demand for assets considered the most safe. The Dollar Index, which measures the currency against six major trading partners, jumped as much as 1.4 percent.
    Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates jumped the most relative to Treasuries in almost a year as investors flocked to the safety of U.S. government notes on concern Europe’s leaders aren’t doing enough to halt their debt crisis.
    Spreads on Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds widened about 0.1 percentage point to 0.89 percentage point more than 10-year Treasuries as of 2:45 p.m. in New York, the biggest jump since May 27, according to data compiled by Bloomberg.
    The gap touched a record low of 0.59 percentage point on March 29 as the Federal Reserve that month completed its purchases of $1.25 trillion of agency mortgage bonds.
    “Fear is taking over, and images of Greek mobs aren’t helping,” said Larry Peruzzi, equity trader at Cabrera Capital Markets in Boston, Massachusetts, referring to televised images of demonstrations against austerity measures in Athens. “Buyers are stepping aside and disregarding fundamentals.”

    The number of people continuing to receive jobless benefits dropped by 59,000, to 4.59 million, in the week ended April 24; economists had expected a decline to 4.61 million. The continuing claims figure does not include the number of people receiving extended benefits under federal programs.

    A separate report from the Labor Department said that productivity rose at a 3.6% annual rate in the first quarter, the smallest pace in a year, after rising at a 6.3% pace in the fourth quarter. Economists were looking for employee output to have risen at a 2.5% pace.

    Unit labor costs fell at a 1.6% pace last quarter after a 5.6% drop in the fourth quarter. Economists had expected costs to have declined 0.7%. 
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