By Kristina Peterson
Worries that growth in Europe will become sluggish sent U.S.
stocks sinking Friday, while a stronger dollar bit into
commodities.
The Dow Jones Industrial Average (DJI) fell 184 points, or 1.7%,
to 10,599 in recent trading, hurt by declines in all 30 of its
components. American Express (AXP) sank 6% as investors shunned
riskier stocks, including financials. Alcoa (AA) sank 4.1% as
metals futures declined.
The Nasdaq Composite (RIXF) slid 2.6%, and the Standard &
Poor's 500-stock index (SPX) shed 2.4%, 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 3%.
The euro sank to its lowest level since October 2008, trading
recently below $1.24, 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 Chief Executive Josef Ackermann told German
television Thursday evening that there are some doubts about
Greece's ability to repay debt.
The CBOE Market Volatility Index (VIX), known as the market's
"fear gauge," jumped 22%.
Basic materials and energy stocks slid as a stronger dollar cut
into buying power. Crude-oil prices slid $2.79 to a three-month low
of $71.61 a barrel, and other raw materials weakened as prospects
of the international economic recovery dimmed in the wake of
austerity measures adopted in several European countries. United
States Steel (X) slid 6.8%, while AK Steel (AKS) fell 4.3%.
Titanium Metals (TIE) shed 4%.
Chemical companies, which tend to have more European exposure,
sank. Dow Chemical (DOW) slid 6.2% and Eastman Chemical (EMN) fell
4.4%.
Financials also weakened as investors flocked toward more
defensive stocks. J.P. Morgan Chase (JPM) slid 2.6%, while
Citigroup (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 on Friday, despite significant European exposure,
likely because they are viewed as safer, steadier investments.
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.
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, Vaughn said. "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 26/32, pushing
the yield down to 3.442%. Meanwhile, gold futures edged higher.
Financial stocks sank after the 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 (V) tumbled 9.2%, while MasterCard (MA) fell 8.4% and Bank of
America (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 declined
0.8%.
In economic news, 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 (JWN) slid 4.6% after its
profit missed analyst estimates, while J.C. Penney (JCP) shed 3%
after its first-quarter earnings rose but its second-quarter and
full-year outlook disappointed analysts.