By Kristina Peterson
Worries that growth in Europe will become sluggish sent U.S.
stocks sinking on Friday, while a stronger dollar bit into
commodities.
The Dow Jones Industrial Average (DJI) fell 203 points, or 1.9%,
to 10,580 in recent trading. All but two of the Dow's components
were in the red. American Express Co. (AXP) sank 4.3% as investors
shunned riskier stocks, including financials. Alcoa Inc. (AA) sank
3.5% as metals futures declined.
The Nasdaq Composite Index (RIXF) slid 2.7%, and the S&P 500
Index (SPX) shed 2.3%, with all of its sectors in the red.
The Russell 2000 index of small-capitalization stocks,
considered riskier because of their higher volatility and lower
cash reserves, plunged 2.8%.
The euro sank to its lowest level since October 2008, trading
recently at $1.2407, after new economic data showed core inflation
in Spain turned negative in April. Deflation would make it harder
for Spain to grow out of its debt woes.
Some analysts questioned whether austerity measures announced
this week in Spain and Portugal could lead to civil strife, and
Deutsche Bank AG (DB) Chief Executive Josef Ackermann told German
television Thursday evening that there are some doubts about
Greece's ability to repay debt.
For U.S. investors, especially those with memories of the Asian
currency crisis of the late 1990s, the concern is that debt crises
like Greece's will spread to other euro-zone members, weakening
growth in a major market and hurting American financial companies
with ties to European banks.
"You have to worry about the counterparty risk and clearly our
banks are closely tied with other global large banks," said Jerome
Heppelmann, portfolio manager at Old Mutual Focused Fund.
The CBOE Market Volatility Index (VIX), known as the market's
"fear gauge," jumped 24%. Three hours after the market's open, 3.2
billion shares had traded hands in New York Stock Exchange
composite volume.
Basic materials and energy stocks slid as a stronger dollar cut
into buying power. Crude prices dropped nearly 3% to fall close to
$72 a barrel and materials weakened as prospects of the
international economic recovery dimmed in the wake of austerity
measures adopted in several European countries. U.S. Steel Corp.
(X) slid 6.8%, while AK Steel Holding Corp. (AKS) fell 4.3%.
Titanium Metals Corp. (TIE) shed 4.1%.
Chemical companies, which tend to have more European exposure,
sank. Dow Chemical Co. (DOW) slid 5.9% and Eastman Chemical Co.
(EMN) fell 3.7%.
Financials also weakened as investors flocked toward more
defensive stocks. J.P. Morgan Chase & Co. (JPM) slid 3.1%,
while Citigroup Inc. (C) fell 3.7%.
"The concerns are really more risk first, currency-adjusted
earnings second," said Bill Vaughn, equity portfolio manager at
Evercore Wealth Management, noting that consumer staples showed
less of a decline Friday, despite significant European exposure,
likely because they are viewed as safer, steadier investments.
Failure of will?
Almost a week after the European Union outlined a nearly $1
trillion rescue package for Greece, some U.S. investors say they
have lost confidence in the will of European nations to enact
proposed austerity measures.
"The European Central Bank's view of sanitizing the debt is
maybe not quite the same as how the Fed acted in this country,"
with its quantitative-easing program, said Vaughn. "There's concern
that it still might not fully address the problem they have."
The dollar strengthened against the euro, but slipped against
the yen. The U.S. Dollar Index (DXY), which tracks the dollar
against a basket of six other currencies, surged 1% and investors
swarmed to Treasurys. The 10-year note (UST10Y) rose, pushing yield
down to 3.43%. Meanwhile, gold futures advanced.
Financial stocks sank after the U.S. Senate voted to allow the
Federal Reserve to regulate fees on debit card transactions. The
measure will also allow retails more leverage in negotiating with
credit-card firms and banks over the fees for card transactions.
Visa Inc. (V) tumbled 11%, while MasterCard Inc. (MA) fell 9.4% and
Bank of America Corp. (BAC) fell 3.5%.
The Senate also approved a measure that would establish a
federal credit-rating board that would act as a middleman between
issuers seeking ratings and the rating agencies. Moody's Corp.
(MCO) declined 0.5%.
U.S. economic data helped pare some of the morning's larger
losses.
The Commerce Department said retail sales rose 0.4% in April,
better than the 0.1% decrease expected by economists surveyed by
Dow Jones Newswires. However, some of that demand may have been
driven by the government's home-buyer tax credit, which expired at
the end of last month. Building-material and garden-supply store
sales posted the largest gain of any category in April.
Offsetting the data, several retailers reporting earnings on
Friday disappointed investors. Nordstrom Inc. (JWN) slid 3.2% after
its profit missed analyst estimates, while J.C. Penney Co. (JCP)
shed 2.9% after its first-quarter earnings rose, but its
second-quarter and full-year outlook disappointed analysts.