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Rising European debt worries hammer stocks

Markets worldwide drop steeply as debt problems in Europe spread. Gold futures continue sliding.

December 18, 2009|Tom Petruno
  • Jonathan Corpina, left, and Louis Silk work the New York Stock Exchange floor, where the Dow Jones industrial average slid 132.86 points, or 1.3%, to 10,308.26.
Jonathan Corpina, left, and Louis Silk work the New York Stock Exchange… (Richard Drew / Associated…)

Rising worries about European debt woes helped trip stocks worldwide Thursday, just as many investors were hoping for uneventful trading to close the books on a winning year.

Fresh market jitters boosted the dollar in its role as a haven, extending the U.S. currency's surprising snap-back over the last three weeks. The euro slumped to a three-month low of $1.435 from $1.452 on Wednesday.

The Dow Jones industrial average slid 132.86 points, or 1.3%, to 10,308.26 -- not a huge loss but the largest since Nov. 27, when the blue-chip index dropped 1.5% on news that Middle Eastern emirate Dubai was seeking to suspend payments on some of its debt.

This week, debt concerns shifted to Europe. On Monday, Austria nationalized one of its major banks, Hypo Alpe Adria, which was drowning in bad loans to Eastern European borrowers.

On Thursday, debt-rating firm Standard & Poor's cut Greece's credit grade to BBB-plus from A-minus, citing concerns about the government's mounting deficit.

"It's a reminder that the global economy is still not out of the woods," said Gary Pollack, head of fixed-income research and trading at Deutsche Bank Private Wealth Management in New York.

S&P's move sparked selling in European stocks, pushing key indexes down 1% in Germany, 1.2% in France and 1.4% in Spain. The Greek market, already battered in recent weeks by the country's economic crisis, lost 1.2%.

Analysts also pointed to surprising weakness in some economic data from Europe this week. On Monday, a poll of analyst and investor sentiment about the German economy fell for a third straight month.

Britain on Thursday said retail sales fell in November, the first decline in six months.

For much of this year Europe's economy was widely expected to lead the U.S. in recovery. Such optimism -- and anticipation that it might prompt the European Central Bank to raise interest rates before the Federal Reserve -- helped bolster the euro against the dollar, pushing the European currency to a 16-month high of $1.513 on Nov. 25.

The dollar's weakness, in turn, has been bullish for the U.S. stock market all year, boosting shares of exporters that were likely to benefit as their products became less expensive for foreign buyers.

But the euro and other foreign currencies have lost favor since Dubai's debt troubles were revealed, as many global investors and traders have turned back to the dollar as a place to hide. That shift accelerated Thursday after Greece's credit downgrade.

The dollar's resurgence has been a particularly hard blow to owners of gold. Its price had rocketed since June as investors sought it as an alternative to the eroding greenback.

Near-term gold futures in New York sank $28.70 to $1,106.80 an ounce Thursday. The metal is down 9.1% from its record closing high of $1,217.40 on Dec. 3. "Johnny-come-latelies to gold are getting hammered here," said Larry Young, a trader at Infinity Futures in Chicago.

For Wall Street, the rebounding dollar is a potential negative for many exporters. The Standard & Poor's 500 index, heavy with multinational firms, slid 13.10 points, or 1.2%, to 1,096.08 Thursday.

The Nasdaq composite index, dominated by major tech firms that do significant business overseas, dropped 26.86 points, or 1.2%, to 2,180.05.

Some investors sold stocks and shifted to Treasury bonds, driving yields lower. The 10-year T-note dived to 3.45% from 3.59% on Wednesday.

Analysts said the stock market's weakness also reflected fears that the Federal Reserve might begin to tighten credit before late next year.

In a statement Wednesday after their last meeting of the year, Fed policymakers sounded relatively upbeat about the economic recovery. Although the Fed repeated its pledge to keep short-term interest rates near zero for an "extended period," the central bank also reiterated that most of the special lending programs created during the worst of the credit crunch would be terminated Feb. 1.

That raised concerns that the financial system might still be too weak to handle even a modest move to take away the Fed's financial support, given expectations for rising losses on home mortgages, commercial real estate loans and other debt in 2010, said Dave Rovelli, trading chief at brokerage Canaccord Adams in Boston.

"This is far from over," he said of banks' loan problems.

Financial stocks also were under pressure Thursday from Citigroup's sale of $17 billion in new common stock. Investors demanded a sharp discount to digest the shares: Citigroup priced the offering at $3.15 a share, 8.7% below the market closing price of $3.45 on Wednesday. The stock closed Thursday at $3.20.

Among other bank stocks, Bank of America fell 42 cents to $14.86 and JPMorgan lost $1.09 to $40.27. Goldman Sachs dropped $4.06 to $160.93 and Morgan Stanley slid $1.22 to $29.12 after analyst Meredith Whitney cut their 2010 and 2011 earnings estimates.

Despite the market's pullback, analysts noted that key indexes, including the Dow and the S&P 500, had just hit new one-year highs Monday.

Dan McMahon, a veteran trader at brokerage Raymond James in New York, said many investors still were hoping to sit on their hands through the holiday weeks, preserving the year's big gains.

Barring a sustained sell-off, he said, "there's no catalyst to do anything" until January.

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