Dow Ends With 387 Point Loss For 2nd Worst Day Of The Year
NEW YORK (MarketWatch) - U.S. stocks fell sharply Thursday, socking the Dow with its second worst close so far this year, as reports of liquidating hedge funds triggered more credit-related anxiety, which earlier led three central banks to intervene in an attempt to calm markets.
"Folks are nervous - the question is whether investors will look beyond the valley of subprime to the peaks ahead. That's the quandary that investors are going through," said Al Goldman, chief strategist at AG Edwards.
The Dow Jones Industrial Average slumped 387 points, , or 2.8%, to 13,270, with all but one of its 30 components ending in the red, including Citigroup Inc. , which fell 5.2%, leading a slump in the financial sector that also hit JP Morgan Chase Co. , whose stock also dropped over 5%.
The S&P 500 , which is heavily influenced by financial shares, took the brunt of the losses, losing 44 points, or 3%, to 1,453.
The Nasdaq Composite fell 56 points, or 2.2%, to 2,556.
The final hour of trading has been extremely volatile in recent days, with large swings in either direction attributed by some analysts to large trading programs.
Dow component American International Group Inc. fell 3.3% after the world's largest insurer said residential mortgage delinquencies and defaults are climbing, signaling damage in the mortgage market could be expanding.
Wal-Mart Stores , also a blue chip, fell 4% after the retailer said its July sales at stores open at least one year rose 1.9%. Analysts, on average, had expected the same-store sales to rise 1.5%.
At the New York Stock Exchange, volume hit nearly 2.8 billion shares, with declining issues outpacing advancers nearly 4 to 1. At the Nasdaq, 3.5 billion shares exchanged hands, with declining stocks topping advancing issues by nearly 2 to 1.
French bank woes lead central banks to act
Bad U.S. home loans have already hit a number of hedge funds and financial institutions in the U.S., Australia and in Germany.
On Thursday, news that French banking group BNP Paribas had suspended three funds with exposure to U.S. credit markets actually led three key central banks to inject liquidity in the global financial system.
BNP said it has become impossible to accurately value its funds after "the complete evaporation of liquidity" in markets.
"Subprime problems have now gone global," said Kathy Lien, chief strategist of DailyFX.com. The damage "is no longer limited to just small banks and mortgage lenders, but is now hitting Tier 1 banks around the world."
Following the news, the European Central Bank said it allocated 94.841 billion euros, or about $131 billion, to 49 bidders in a one day quick tender at 4.0% to add liquidity to the money markets, a step the ECB last made the day after September 11, 2001.
And as part of its weekly open-market actions, the Federal Reserve added another $12 billion in temporary reserves to the banking system through 14-day repurchases, double the amount added the prior week.
The Bank of Canada followed suit, injecting C$1.455 billion into the markets to help liquidity.
The Fed move came two days after the Federal Open Market Committee opted to sit tight on interest rates and retain its focus on inflation, while acknowledging there were risks from the recent turmoil in financial markets.
"What stands out most from this situation is its proximity to the Federal Reserve's meeting on Tuesday. If the Fed had even the slightest inkling that a problem of this scale might occur, its statement would have had a full tilt toward neutral rather than the partial tilt it gave," Tony Crescenzi, Chief bond market strategist at Miller Tabak & Co. LLC, wrote in a note.
"Today's events show that either the Fed committed a large policy error on Tuesday, or that both the Fed and the ECB are themselves more in the dark on the problems that lie underneath the surfce than are investors in the financial markets," Crescenzi said.
More hedge fund woes
A hedge fund run by Goldman Sachs has sold some of its positions recently, the Wall Street Journal reported.
In addition, Black Mesa Capital, a hedge fund firm that uses computer models to track arbitrage opportunities, has told investors that at least one very large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, NM-based firm sent to investors on Wednesday.
The portfolio liquidation is causing disruptions and triggering losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained by MarketWatch on Thursday. "Clearly, something is amiss in the markets that few in our strategy team, if anyone, have experienced before," Black Mesa wrote.
Yen rallies
In New York trade, the yen surged across the board, with the dollar quoted at 118.56 yen vs. 119.68 yen late Wednesday. The euro was at 162.39 yen vs. 164.81.
Oil prices slumped, with the September-dated light crude contract closing down 56 cents at $71.59 a barrel on the New York Mercantile Exchange.
Treasury prices rallied, driving yields lower, as investors turned away from stocks to the safety of bonds. The benchmark 10-year note ended up 21/32 at 99 23/32, its yield falling to 4.787%.
Gold futures fell 2%, pressured by renewed worries over the credit markets, the slide in stock prices and the rising dollar. Gold for December deliver closed off $13.50 to $672.80 an ounce on the New York Mercantile Exchange.
By Kate Gibson