After a steady slump over the previous two weeks, global stocks encountered a particularly nasty bout of turbulence on Thursday as investors grew fearful of a slide in the U.S. economy and a flare-up in the European debt crisis.
Major U.S. indexes received most of the attention, after both the Dow Jones industrial average and the S&P 500 fell into official correction territory, defined as a drop of 10 per cent or more. In afternoon trading, the Dow was down 415 points, or 3.49 per cent, to 11,480 – marking its lowest level this year. The broader S&P 500 was down 37 points or 3 per cent, to 1,223.
Although the S&P 500 suffered a bigger setback last summer, when investors were similarly focused on the European debt crisis and sluggish U.S. economic growth, this recent setback marks its worst nine-day slump since the stock market began to recover in early 2009.
However, stocks were down elsewhere, too. The commodity-heavy S&P/TSX composite index was down 388 points or 3 per cent, to 12,429, as investors recoiled from energy and materials stocks.
In Europe, where the bloc's central bank activity anti-crisis measure to help prevent the debt crisis from spilling into Italy and Spain, the declines were even more severe. Germany's DAX index closed down 3.4 per cent and the U.K.'s FTSE 100 fell 3.4 per cent.
As investors ran from stocks, they looked for safety in the usual places: the U.S. dollar and Treasury bonds. The U.S. dollar index, which measures the greenback against a basket of currencies, jumped 1.3 per cent. The yield on the 10-year U.S. Treasury bond, which moves in the opposite direction to price, fell to 2.47 per cent, marking its lowest level since October.
By comparison, gold looked weak, despite its reputation for being a safe haven – especially during the financial uncertainty that lingered over global markets during the recent wrangling in Washington to extend the U.S. debt ceiling. Gold fell to $1,653 (U.S.) an ounce in New York, down $9.
Reflecting investor anxiety, the CBOE Volatility index , or VIX, jumped above 27, hitting its highest level since the middle of March, when investors were unsure about the economic fallout from the devastating earthquake and tsunami that struck Japan. In early July, the VIX was as low as 16.
Recent disappointing U.S. economic data has definitely contributed to the mood. Last Friday, second quarter economic growth was reported at just 1.3 per cent, dashing optimism that growth would be strong enough to lower unemployment. More recently, readings on manufacturing activity and non-manufacturing activity have also fallen below expectations and are flirting with contraction territory.
This Friday morning, the U.S. Labor Department will release what is arguably the most important economic report of the month: The non-farm payrolls numbers for July. Economists are cautious, expecting overall gains of just 85,000 and a steady unemployment rate of 9.2 per cent.
Meanwhile, trouble is brewing in Europe. The European Central Bank halted its rate-hike campaign and employed a couple of anti-crisis measures to prevent the debt crisis from spilling into Italy and Spain.
Those two heavily indebted countries have seen the yields on their government bonds spike in recent days, raising borrowing costs, creating difficulties at some banks and of course instilling concern among investors that the recent bailout of Greece had done little to contain a crisis that has weighed on global markets for well over a year.
On Thursday, the ECB resumed bond purchases of distressed euro-area bonds in an effort to bring yields back down for the first time in five months. It also announced a plan to lend banks unlimited amounts of money to provide a jolt of liquidity to the market. This decision came a month ahead of a scheduled decision on the policy, underlining the central bank's haste to do something to soothe rattled markets – to little effect.
Some observers have been eyeing the U.S. Federal Reserve for a potential balm. The Fed has been willing in the past to help calm markets by employing a stimulative move known as quantitative easing – or printing money to buy bonds. The central bank has turned to quantitative easing twice already, and some observers believe it could move a third time if economic growth turns particularly weak.
Hopes for such a move may have been behind Wednesday's modest rebound in stocks, when the Dow posted its first gain in eight trading sessions.
David Berman