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Dow falls 519 pts on Europe debt crisis, Sensex steady

Dow Jones industrial average closed 519 points down on mounting concerns about Europe's debt crisis and France's debt rating cut. Other Asian markets, however, fell sharply on China's inflation peaking, which is seen to hit its growth.
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BT Online Bureau   New York     Last Updated: August 11, 2011  | 17:40 IST

The Sensex on Thursday kept stock market investors guessing as it continued to trade steady through the day, shrugging off the downfall in US and other Asian markets.

HOW THE MARKETS FARED

The BSE index ended the day 71.11 points or 0.42 per cent, lower at 17,059.40, while the National Stock Exchange index Nifty closed at 5,138.30, down 22.70 points or 0.44 per cent.

The Sensex, despite maintaining modest losses during the day, traded in the green too, when at 12.47 pm, is was up 53.51 points, or 0.31 per cent, at 17,184.02. The National Stock Exchange index Nifty too held firm and was up 12.75 or 0.25 per cent at 5,173.75 at the same time.

However, fear returned to haunt Wall Street on Wednesday as the stocks plunged 519 points, triggered by mounting concerns about the health of Europe's banks and France's debt rating cut.

Asian markets also took a beating and fell sharply over added concerns that higher inflation in China could lead to slower growth.

The Dow Jones industrial average closed down 519 points, with selling largely spurred by worries about Europe. American bank stocks took hits because investors fretted that debt problems overseas might reach the United States.

The Indian markets had opened lower in early morning trade, mostly on concerns about the fall in the global markets. At 9.53 am, the BSE benhcmark was down 10.74 points at 17119.77. Similarly, Nifty was down 10.55 points at 5150.45 at the same time.

The US Federal Reserve on Tuesday decided to keep interest rates near zero per cent for the next two years. After some initial confusion, the stock market staged a huge comeback and had one of its best days.

PERSPECTIVE: Markets grab Fed's olive branch

But the interest-rate news proved to be a distraction. The Fed made the pledge because it sees almost no chance that the economy will improve substantially by 2013, and when investors focused on that, they dumped stocks again.

"Now it gets back to the fundamentals," said Mark Lamkin, founder of Lamkin Wealth Management, which manages $215 million.

The Dow closed at 10,719.94, down 4.6 per cent for the day. By points, it was the ninth-steepest decline for the market. The Dow has now lost more than 2,000 points in less than three weeks.

Wednesday was another day marked by big moves. The Dow was down more than 300 points within minutes of the opening bell. It recovered some of that loss, then drifted steadily lower in the last two hours.

The market has traded that way for two weeks, lurching up and down. The most extreme example was Tuesday, when the Dow swung more than 600 points in the one hour and 45 minutes after the Fed's statement.

BLOG:How China's loss will be India's gain in the times of US crisis

The stomach-churning highs and lows are reminiscent of the fall of 2008, the depths of the financial crisis, when swings of 800 or even 1,000 points in day were not unheard of.

Computerized trading systems - programmed to analyze charts, capitalise on the tiniest changes in price and execute trades with no human intervention - are making the market rougher.

High-frequency trading programs make up about half of the trades in a normal market day but 70 per cent or more on a volatile one. The programme pounce on stock changes to make just slivers of a penny but do it so often that it adds up to real dollars.

Other investors also use charts and market indicators to make trades based on market momentum. The bet is that if the market is rising, it will keep rising, and if it's falling, it will keep falling.

More investors are turning to this strategy because the sudden slowdown in the economy has left them unable to judge companies based on their fundamentals, like projected profits. The more people use a momentum strategy, the faster the decline.

PERSPECTIVE:US sneezes, India catches a cold

The S&P 500 finished the day down 4.4 per cent and the Nasdaq composite index down 4.1 per cent.

Financial stocks led the market lower. Bank of America and Citigroup each lost more than 10 per cent of their market value. Wall Street is worried because it doesn't know how badly American banks might be hurt by Europe's debt problems.

Investors fear Italy and Spain will be the next countries unable to repay their debts. The European financial system has been battered by fears about banks holding bonds of heavily indebted countries such as Greece and Portugal.

"It's the same game of Old Maid playing out in Europe that was played out here during the subprime mortgage crisis," said Quincy Krosby, an economist and market strategist with Prudential Financial.

The fear is that if European governments default on their bonds, it will hurt the European banks that own them. That could start a chain reaction that hurts the United States, because large US banks own European bank debt.

Europe is also a big market for US companies. It accounted for about 29 per cent of foreign sales for S&P 500 companies last year.

France came under pressure on Wednesday amid concerns that it could become the next country to lose its top AAA rating. The cost of insuring against a default of French government debt hit a record, according to data from Markit.

In Asia, the concern is that higher inflation in China could lead to slower growth. China, Brazil and other less-developed countries have provided the strongest economic growth since the world began to recover from recession in 2009.

Gold rose above $1,800 per ounce for the first time as more money poured into investments considered safe at a volatile time for the financial markets. Gold closed up about $41 at $1,784.

The 10-year Treasury note, which has also served as a haven, also rose sharply. Its yield fell to 2.11 per cent from 2.26 percent late Tuesday. It had reached a record low of 2.03 percent on Tuesday. A bond's yield falls when its price rises.

Investors have bought US government debt even after S&P stripped the United States of its top credit rating, AAA, late last week.

Nearly three stocks fell for every one that rose on the New York Stock Exchange. Consolidated trading volume was heavier than usual, 8.3 billion shares. In July, average daily volume was less than half that. On Monday, it was 9.9 billion, the highest since September 2008.

With Agency inputs

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