Obama takes tougher line on oil spill

By TOM LAURICELLA

New worries about the health of the global economy flared Thursday, driving U.S. stocks to their first official correction since the bull market began last March, roiling credit markets and causing big swings in currencies.

Large investors, such as hedge funds, pared back riskier investments that tend to do better in a global economic rebound but get hammered harder in a slowdown. Many shed investments in emerging-market or commodity-producing countries like Brazil or Australia. Such investments had been a popular way to bet that the global economies were recovering from the steep recession that grew out of the financial crisis.

Investors, meantime, snapped up U.S. Treasurys and the Japanese yen, assets viewed as relatively safe in times of turmoil.

There was no one particular piece of news that drove Thursday's market swoon. Instead, investors said it was an accumulation of worrisome developments, primarily out of Europe, where officials are struggling to convince the market they have the Greece crisis under control. Worries mounted that the troubles may spread beyond Europe to stymie growth elsewhere. And China's effort to tighten monetary policy has made investors increasingly nervous about growth slowing in that country.

Concerns are building that the progress made in pulling the global economy out of recession is slipping away. That contrasts with the sentiment this time last year when central banks and governments seemed to be working effectively together to stabilize the markets and economy.

"Before, there was a sense that things were heading in the right direction," said Scott MacDonald, head of research at brokerage and money-manager Aladdin Capital. "The issue that people are really wrestling with is now we don't know where things are going."

The retreat from riskier investments hit the U.S. stock market from the opening bell and gathered steam until the close of trading. By session's end the Dow Jones Industrial Average lost 376.36 points, or 3.6%, to close at 10068.01. That marked its third consecutive day of losses and leaves the Dow down 10.15% from its 2010 closing high hit on April 26.

With a decline of more than 10% from its high, the Dow's selloff has reached what traders refer to as a "correction" of the rally that began on March 10, 2009. Many analysts said such a pullback was long overdue, especially given the questions about Europe's future.

 

PM Report: Market Free Fall

8:32

The Dow closes down more than 360 points. Barron's Bob O'Brien and WSJ's Grainne McCarthy joins the News Hub with more. Plus, the financial overhaul heads to the finish line; and a historic look at all the stars that passed through the doors of "Law & Order."

Despite the size of the decline Thursday, there were no signs of the kind of trading problems that accompanied the stock market's "flash crash" back on May 6, in which the Dow dropped more than 700 points in the span of a few minutes and some individual stocks briefly lost all their value.

Still, traders described conditions in the financial markets as unsettled and volatile. The Chicago Board Options Exchange Volatility Index, or VIX, often called the "fear gauge," jumped nearly 30% to its highest level since March 2009.

Another sign of growing nervousness: a rise in the London interbank offered rate, at which banks lend money to each other overnight. It rose on Thursday to 0.48%, its highest level since last July.

In the U.S., corporate bonds, which posted huge gains in 2009 on the back of expectations for an economic recovery, fell for the fifth straight day.

Prices of oil, copper and gasoline dropped. Even gold, often seen as a safe-haven asset, declined. Gold also acts as a hedge against inflation, and its decline indicates that investors may be less worried about growth fuelling a rise in prices.

View Full Image

Reuters

Traders in the oil options pit at the New York Mercantile Exchange Thursday. Oil fell below $68 a barrel, the lowest in nearly eight months.

If there's a silver lining, it's that the market's moves—including lower oil prices and lower yields on government bonds, which push down mortgage rates—could end up helping the U.S. economy.

The average rate on a conforming 30-year fixed-rate mortgage dropped to 4.88% on Thursday, according to HSH Associates in Pompton Plains, N.J. That's the lowest rate since early December.

In addition, the uncertainty rippling out from Europe is pushing back expectations for an interest-rate increase from the Federal Reserve.

With the exception of an unexpected big rise in initial jobless claims reported Thursday morning, economic data has been pointing to a continued rebound in the U.S. economy. That, in turn, had boosted expectations that the Fed would raise interest rates by year-end. Now analysts say the Fed may keep interest rates close to zero until well into next year.

"The worse things get in the markets, the more it takes interest-rate hikes off the table," said Eric Stein, a portfolio manager at Eaton Vance.

The deterioration in market sentiment this week comes despite the massive European bailout package unveiled earlier this month. While that plan soothed short-term fears about the Greek debt crisis spreading, it didn't convince investors that longer-term fiscal problems would be addressed. Adding fuel to the fire was Germany's unilateral move earlier this week to ban certain types of bearish bets on stocks and bonds.

For investors, that highlighted a lack of unity among European governments in dealing with the crisis. "That feeds into the financial markets' worst enemy—a lack of confidence," said Aladdin's Mr. MacDonald.