Stocks drop after euro slumps, Dow falls below 10K

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Published: May 25,2010

NEW YORK — The Dow Jones industrials plunged below 10,000 Tuesday after traders dumped stocks on expectations that the world economy will weaken in the coming months.

The Dow fell about 200 points in afternoon trading. It has fallen about 1,340 points, or nearly 12 percent, from its recent high of 11,205, reached April 26. The Dow and broader stock indexes all fell about 2 percent.

Investors also exited the euro and commodities including oil and again sought safety in Treasurys. That drove interest rates lower. The benchmark 10-year note’s yield fell to its lowest level since April 2009.

Investors were anxious about problems beyond the financial crisis in Europe. Tensions between North and South Korea reminded traders that political issues can be a threat to economic growth. And analysts said that even the still unresolved oil spill in the Gulf of Mexico contributed to investors’ foul mood.

Still, uncertainty over the impact that Europe’s debt problems could have on the rest of the world in the coming months remains the biggest driver of investor pessimism, said Jonathan Corpina, president of Meridian Equity Partners. The largest concern is that painful austerity measures that European governments are being forced to take could lead to a prolonged economic slump in the region and cause another global recession. And investors fear that even those measures won’t contain the crisis, Corpina said.

"It seems like the Europeans are playing ‘tag, you’re it ‘ — first it was Greece and now it’s maybe Spain or Portugal," said Corpina, a New York Stock Exchange floor trader. "We know someone else is next. The problem is that it seems like every plan in place isn’t going to satisfy the needs."

A warning of hard times came from Britain’s Queen Elizabeth, who opened the new session of Parliament with a speech delivered on behalf of Britain’s new coalition government. The queen, said there would be budget cuts because "the first priority is to reduce the deficit and restore economic growth."

Other European countries are imposing budget cuts as well, trying to control their debts. Investors are concerned that these steps will stifle economic growth, and that other countries including the U.S. will inevitably see their own growth stunted.

European Union leaders warned Tuesday that the continent’s economy would stagnate unless governments make major reforms to promote growth. The problem is, though, that large debts in some countries make it difficult to implement stimulus measures to rally economies.

The market’s continuing slide, with frequent triple-digit drops in the Dow, recalls the unrelenting selling of the 2008 financial crash. It begs the question, what can halt the plunge?

Jim Dunigan, managing executive of investments for PNC Wealth Management, said good news about jobs or corporate earnings could stabilize stocks by signaling that a U.S. recovery is intact. The government’s monthly jobs report in less than two weeks is expected to show that employers are continuing to ramp up hiring. And companies will soon start giving hints about profits for the quarter that ends in June.

"You could derail growth in Europe and not derail growth in the United States but people don’t necessary use a lot of logic when they’re headed to the exits," Dunigan said.

But right now, traders aren’t being swayed by upbeat U.S. economic news. They ignored a better-than-expected report on consumer confidence Tuesday. The Conference Board’s consumer confidence index rose for the third straight month, climbing to 63.3 in May from 57.7 last month.

The reason for that is the fact that investors are not focusing on current signs of growth. instead, they are trying to gauge where the global economy will be later this year.

"Market participants feel like they’re walking on eggshells," said Oliver Pursche, executive vice president at Gary Goldberg Financial Services in Suffern, N.Y. "Every small piece of potentially bad news is being exaggerated and mentally being fast-forwarded to the worst-case scenario."

Markets were also hurt by reports that North Korean leader Kim Jong Il ordered his military to combat alert because of rising tensions on the Korean peninsula. North Korea also said it would cease communication and relations with Seoul. South Korea has said North Korea was responsible for the sinking of a South Korean warship two months ago. Major indexes in Japan and Hong Kong fell more than 3 percent.

Meanwhile, the monthlong effort to cap the Gulf oil well that has spewed millions of gallons of oil is also rattling investors, Corpina said. Oil is now starting to come ashore across a 150-mile swath of the Gulf Coast, endangering wildlife and livelihoods in commercial fishing and tourism.

"The worry is that the situation is getting worse and there’s no real fix," he said. "First we were just talking about the oil industry being affected. Now it’s the environment and fishing industries. Next we’ll be talking about the hotel and leisure industries."

A disappointing report on U.S. home prices added to the downcast mood. The Standard & Poor’s/Case-Shiller 20-city home price index fell 0.5 percent in March from February, a sign that the housing market remains weak even as mortgage rates are still near historic lows.

The Dow fell 201.48, or 2 percent, to 9,864.94 by mid-afternoon. Only one of the 30 Dow stocks, Home Depot Inc., rose, and that was just by pennies.

The Standard & Poor’s 500 index fell 21.77, or 2 percent, to 1,051.88. The index hit its lowest level of the year in early trading, dropping to 1,040.78.

The Nasdaq composite index fell 46.64, or 2.1 percent, to 2,166.91.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.14 percent from 3.20 percent late Monday. It fell as low as 3.07 percent, its lowest level since April 2009.

The yield on the 30-year bond briefly fell below 4 percent for the first time since October, before rising slightly. It is down to 4.04 percent from 4.08 percent late Monday.

Crude oil fell $2.20 to $68.01 a barrel on the New York Mercantile Exchange, in part a reflection of expectations that weak economic growth will curtail demand for fuel.

Overseas markets were also down sharply. Britain’s FTSE 100 dropped 2.5 percent, Germany’s DAX index lost 2.3 percent, and France’s CAC-40 plummeted 2.9 percent. Japan’s Nikkei stock average fell 3.1 percent. Hong Kong’s Hang Seng fell 3.3 percent.

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