New York – The realization that weakness in the U.S. housing and credit markets is spreading – and affecting companies and markets abroad – sent Wall Street skidding sharply lower once more.
The Dow Jones industrial average and Standard & Poor’s 500 index suffered their biggest one-day plunges since Feb. 27, when subprime-mortgage-related jitters were also partially responsible for a sell-off.
This time, investors cashed out of stocks and fled to safer assets such as U.S. Treasury bonds when a French bank said it was freezing three funds that invested in U.S. subprime mortgages. The reason: It was unable to properly value their assets.
The announcement by BNP Paribas rekindled investors’ fears that financial institutions will get tighter with their assets and that companies, investors and individuals won’t be able to borrow money.
“Trust was shaken today,” said Thomas Mayer, the chief European economist at Deutsche Bank in Frankfurt. “Credit depends on trust. If trust disappears, then credit disappears, and you have a systemic issue.”
A move by the European Central Bank to provide more cash to money markets intensified Wall Street’s angst. Although the bank’s loan of more than $130 billion in overnight funds to banks at a low rate of 4 percent was intended to calm investors, Wall Street saw it as confirmation of the credit markets’ problems. It was the ECB’s biggest injection ever.
The Federal Reserve added a larger-than-normal $24 billion in temporary reserves to the U.S. banking system.
The ECB’s injection of money into the system is an unprecedented move, said Joseph Battipaglia, chief investment officer at Ryan Beck & Co., adding that it shows that problems in subprime lending are, in fact, spreading into the general economy.
“This is a mini-panic,” he said. “All the things that had been denied up until this point are unraveling. On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.”
The Dow fell 387.18, or 2.83 percent, to 13,270.68.
Thursday’s pullback continued an erratic pattern of triple- digit moves in the Dow since the index closed at a record 14,001.41 on July 19. Eleven of the 15 ensuing sessions have ended in a triple-digit gain or loss. Gains have been evaporating at the first mention of trouble in housing, subprime lending or the credit markets.
The broader S&P 500 fell 44.40, or 2.96 percent, to 1,453.09.
With Thursday’s decline, the Dow is about 730 points, or 5.2 percent, below its record close. Some experts have been calling for a textbook correction – a pullback of at least 10 percent. At its lowest close since the market’s high, last Friday’s finish of 13,181.91, the Dow was 5.85 percent below the record.
As hard a fall as stocks took Thursday, the session was just the latest in a string of volatile days on Wall Street. Yet the Dow, is still up 6.5 percent for the year.
Bonds rose sharply Thursday as investors again sought the relative safety of Treasurys, pushing down the yield on the benchmark 10-year note to 4.79 percent from 4.89 percent late Wednesday.
Before Thursday, the S&P had its best three-day winning streak in nearly five years. But the latest pullback was the biggest point drop and percentage loss for both the Dow and the S&P since the Feb. 27 decline.
The Nasdaq composite index fell 56.49, or 2.16 percent, to 2,556.49. On Wednesday, it posted its biggest point gain in more than year. And while Thursday’s loss was sharp, last Friday’s was more severe.
Despite Thursday’s slide, the major market indexes are still up for the week, given that stocks rose sharply the first three sessions of the week.
The pullback came after a BNP Paribas unit said it was suspending three funds together worth about $3.79 billion and wouldn’t make investor redemptions until it could determine net asset values.
Shares of financial companies, which investors have fled recently amid lending concerns, took another beating Thursday.
Citigroup Inc. fell 5 percent, as did fellow Dow component JPMorgan Chase & Co.
