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Dow Pummeled; Closes Nearly 400 Points Lower
Much of the drop is attributed to European and Asian bank credit woes.
October 6, 2008
A bailout package may have been approved by legislators, but credit concerns eroded US stock prices, at one point sending the Dow Jones Industrial Average (DJIA) lower by nearly 800 points on Monday. The DJIA closed down 359.92 points, or 3.49%, from Friday's close.
Much of the drop is related to concerns about credit woes now hurting European and Asian banks and this is the first time the DJIA has dropped below 10,000 since 2004.
Overnight, the Nikkei was off 4.25%, while the FTSE 100 was off 7.6% and the CAC 40 was off 9%.
On Sunday, BNP Paribas announced it wil acquire Fortis Insurance Belgium's Belgian business, days after the Dutch government came in and purchased all of Fortis' Dutch entities.
Then on Monday, Hypo Real Estate Holding AG said the German government, the German Central Bank, that nation's financial regulator BaFin and senior representatives of the German banking and insurance sector agreed on credit lines for Hypo Real Estate Group. The German Ministry for Finance said the finance sector will grant Hypo Real Estate Group an additional secured credit line of €15 billion in addition to the €35 billion already offered jointly by the German government and finance sector.
On Friday, Hypo, which has assets of €395 billion, said a €35 billion rescue package promised to the Hypo Real Estate Group and extending into 2009 was withdrawn.
The troubles in the finance sector were also evident in a message from Icelandic Prime Minister Geir Haarde: "The government of Iceland, the central bank and the Financial Supervisory Authority have over the past days and weeks worked ceaselessly to find a solution to the enormous difficulties which threaten Icelandic banks, in good cooperation with the banks. The government has, for its part, aimed for the sale by Icelandic banks of foreign assets and a reduced presence abroad, so that the Icelandic state, so small in comparison with the Icelandic banks, would have the capacity to support them."
Investors said the sell-off in US equity markets is also tied to renewed concerns about the US economy. Much of the anxiety about the US economy is tied to a drop in lending by banks as well as a series of economic data that increasingly point to a recession. For example, on Friday the US Labor Department said the US economy lost 159,000 jobs in September.
The DJIA opened at 10,322.52 and its low was 9,525.32. The DJIA, which includes components such as Wal-Mart, Verizon and American Express, closed down 359.92, or 3.49%, from Friday's close. The previous 52-week low was 10,310.20. Volume on Monday was 387.33 million, compared with average volume of 269.93 million.
"It [equity markets] opened weaker and it just got weaker," said a New York equities trader. "The Friday jobs number just spooked people."
"This is pure panic. This is a feeling of helplessness," according to Chris Low, chief economist at FTN Financial. Some of the decline in stock prices was related to further realization among investors that the steady deleveraging within the financial markets will result in slower economic growth.
The outlook on the economy is so pessimistic that many some market observers believe the US central bank will have to cut rates soon. Analysts at Barclays said in an Oct. 3 note to investors that "given the weakeness in the economic data, we expect the Fed will decide to cut rates by 50 bp [basis points] at this month's meeting."
In that same report, Barclays' market watchers revised their economic outlook: "We look for weak GDP growth in Q3 '08, a contraction in Q4 '08."
FTN's Low, meanwhile believes that the US central bank's rate cut will be more like 25 basis points because the Fed is sensitive about the strength of the dollar. Also, any rate cut in the US likely would come after a rate cut by the European Central Bank, according to Low.
Meanwhile, the Fed continued its campaign to shore up liquidity in credit markets on Monday. The US central bank said it will offer $150 billion in 85-day credit through its Term Auction Facility.
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