Posted on Thu, May. 06, 2010
last updated: May 06, 2010 08:36:30 PM
WASHINGTON — In an unnerving outburst of volatility that recalled the 2008 financial crisis, the Dow Jones Industrial Average plunged almost 1,000 points Thursday afternoon before recovering most of its losses, triggered by fears that debt problems in Greece and elsewhere in Europe will infect other high-debt economies around the globe.
A trading glitch, dubbed a fat-finger trade, was suspected of sparking the selloff. CNBC television and other financial outlets reported that a Citigroup trader may have erroneously substituted "billion" for "million" in a large sale.
However, Citigroup said in a statement, "At this point we have no evidence that Citi was involved in any erroneous transaction." Regulators were also examining a sharp drop in the share price of blue chip company Procter & Gamble shortly before the market plunged.
In the end, the Dow closed down 347.80 points, or 3.20 percent, at 10520.32.; it had closed Monday at 11,151.83 and has fallen sharply since. The S&P 500 was down 37.75 points Thursday to 1128.15 and the Nasdaq fell 82.65 points to 2319.64.
Thursday's huge swings on the New York Stock Exchange eerily recalled September and October 2008, when the global finance system teetered on the edge of an abyss. In a repeat of 2008, panicked sellers fled to safe instruments such as U.S. Treasury bonds and gold, which rose by almost 3 percent to above $1,200 an ounce.
After trading closed, the Securities and Exchange Commission and the Commodities Futures Trading Commission issued a joint statement announcing that they were working with other financial regulators and the exchanges "to review the unusual trading activity that took place this afternoon" and "to take appropriate steps to protect investors pursuant to market rules."
All eyes will be on Wall Street Friday morning, where traders will be digesting both the latest developments in increasingly uncertain European markets, election results in Great Britain and the April U.S. jobs report to be released by the Bureau of Labor Statistics. It's projected to show strong job growth, building on March's net gain of 162,000. Friday also will tell whether computerized trading amplified a momentary selloff or whether bearish sentiment is taking hold.
The market slide is occurring even as most economic indicators point to a U.S. recovery gaining steam. Most analysts expect growth to average 3 percent to 3.5 percent this year. The economy has expanded for three consecutive quarters.
Manufacturing and industrial output have grown steadily. Consumers are slowly getting off the sideline, an important development because consumption fuels 70 percent of U.S. economic activity. Even auto sales are up sharply, one sign that Americans are willing to spend big again.
Housing remains a drag, however. The pace of foreclosures continues to accelerate, and what little sales activity there's been was boosted by government measures, including big tax breaks for first-time homebuyers and Federal Reserve purchases of bonds backed by pools of U.S. mortgages.
Housing is greatly influenced by the job market. The jobless rate has held steady at 9.7 percent for three months. Economists believe the economy has to grow by 4 percent or more just to knock down the unemployment rate by a percentage point.
Thursday's steep market drop combined with earlier losses this week on euro fears erased gains built up this year. The drop in Europe's common currency, the euro, and fears of global contagion, immediately triggered fears that the U.S. and global recoveries might prove weaker than hoped.
On Thursday, one euro was the equivalent of about $1.26, a 14-month low.
"It's certainly not good. It affects us on a number of counts," said Morris Goldstein, a senior researcher at the Peterson Institute for International Economics and a former to official at the International Monetary Fund.
Yale University's Robert Shiller, a prominent economist, is worried about a double-dip recession. Speaking to the National Economists Club on Thursday, Shiller said that sluggish growth and high unemployment raise the chances of a slide back into recession.
"We do have the potential for a double dip," he said, adding that "we might be on to another recession before it gets better."
With housing still in the dumps and American consumption rising slowly because of the high jobless rate, exports had been one of the few bright spots for the U.S. economy. However, mounting problems in Europe, a key market for U.S. exports, especially high-tech and high-end goods and services, threaten to hurt that key driver. As the euro loses value against the U.S. dollar, it makes U.S. products more expensive there.
"We're going to be at a competitive disadvantage to exporting to Europe, and a lot of the European impact depends on how much the problems spread to others with large debts," Goldstein said. "The wider the contagion, the worse it is to us, the more the world economy is going to be weaker."
Ironically, just last month the IMF had upped its forecast for global economic growth, from 1.9 percent early this year to over 4 percent.
Global markets are on edge because a long-awaited rescue package from the EU and the IMF for Greece may prove too little, too late. It's taken more than a month for European nations to agree to help Greece, with Germany in particular unhappy about rewarding bad decisions by Greece with a rescue.
Traders were also disappointed by the European Central Bank's refusal to buy Greek debt, a bold confidence-building move like the kind U.S. officials made in 2008.
Greeks themselves are engaged in violent daily protests against the austerity measures being demanded in exchange for the aid. The Greek parliament, on a close vote Thursday, approved the $140 billion bailout package. Analysts, however, have criticized the aid package as too small and too short in duration to solve Greece's massive debt problems.
Financial markets are worried that Greece's problems may pale compared to other debt-ridden larger economies such as Spain and Italy.
"My sense is the IMF is going to have to step in and up the ante to put an end to these fears," said Mark Zandi, chief economist for Moody's Analytics, a forecaster in West Chester, Pa.
"I would expect that they will have to step up soon and do more, there may be creative ways to address this without having to" add to the bailout fund.
Fears about global contagion have become a headache for average Americans, whose retirement income is tied up in the stock market through 401(k) retirement plans.
A 5 percent drop in the Dow this week is akin to about half a trillion dollars in erased market capitalization, Zandi said.
"That's twice Greek GDP (gross domestic product). It makes no sense that global bodies would allow the Greek crisis to infect the global economy in this way," he said.
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