Stock Markets Plunge – evidence that markets are still nervous

Posted on 06. May, 2010 by in News

Stephen Bernard New York — The Associated Press Published on Thursday, May. 06, 2010 5:32PM EDT

Stocks plunged Thursday and took the Dow Jones industrials down almost 1,000 points as investors succumbed to fears that Greece’s debt problems would halt the global economic recovery and talks circulated of a stock trading glitch.

In Toronto, the S&P/TSX (TSX-I11,842.43-32.70-0.28%) fell nearly 450 points in the afternoon before recovering some ground.

Computer selling intensified the selling while investors watched protests in the streets of Athens on TV. Fears are running high in the financial markets that the Greek government will not be able to implement austerity measures that would enable it to contain its debt problems. And, in turn, that the country’s problems will hurt other economies in Europe and even the U.S.

The Dow’s (DJIA-I10,520.32-347.80-3.20%) gyrations showed the high emotions in the markets. Down 998.50 points in mid-afternoon, it recovered minutes later to a loss of 470.

There is speculation that a large U.S. financial firm made an erroneous computer trade on an index, which caused the Dow Jones to plunge from 400 points to 1,000 points, said Andrew Busch, a global foreign exchange strategist with BMO Nesbitt Burns Inc. “You can’t get that to happen unless there is fear,” he said. “The European Monetary Union has done nothing. It’s simply astounding.”

The European Central Bank should be providing liquidity to the financial system though quantitative easing, which is the purchase of securities in the market, he said.

The stock market meltdown sparked a huge move in the Canadian dollar, which in a few minutes plunged 2.42 per cent to a low for the day of 93.14 cents (U.S.) from 95.5 cents before recovering to 95 cents. The high for the day was 97.26 cents.

“There is speculation that there was an error trade put in the S&P-mini’s,” which is a futures trading system in which small and regular-sized orders are posted, said Camilla Sutton, a currency strategist with Scotia Capital Inc.

The Japanese yen and the U.S. dollar were both strong in the flight to safety, Ms. Sutton said.

During the past five trading days, the Canadian dollar has fallen 5 per cent against the greenback.

“I think today highlights just how nervous markets are,” said Ms. Sutton. “Fear is still in the markets.”

The euro-market problems could continue to weigh on the Canadian dollar in the short-term, but in the medium term the loonie is likely to be strong, she said.

Stocks extended their slide into a third day Thursday after news on the U.S. job market failed to ease worries that Greece’s debt woes would spread.

The euro fell further against the dollar, hitting a new 14-month low. The euro has tumbled against the U.S. dollar since last fall as faith in Europe’s shared currency dwindles. Greece’s debt crunch is widely seen as a test of Europe’s ability to restore fiscal discipline to the weak economies in its union and keep the decade-old currency viable.

“It’s going to drop further,” Tim Speiss, chairman of the personal wealth advisers practice at Eisner LLP in New York, said of the euro.

The dollar’s rise pushed commodities prices lower, especially oil. (CL-FT77.11-2.86-3.58%) That sent prices of oil companies like ExxonMobil (XOM-N63.89-2.28-3.45%) and Chevron (CVX-N77.20-2.99-3.73%) lower.

Greece passed a bill in its Parliament after heated debate that calls for unpopular cuts in public spending in pensions and other areas, as well as tax increases. Greece needed to approve the austerity measures to be eligible to receive a $141.9-billion (U.S.) aid package from the International Monetary Fund and the 15 other countries that use the euro.

Greece needs access to an initial portion of the money by May 19 to cover $11.6-billion in debt payments, or it likely will default.

Even if Greece gets the money, there are still worries that the loans would be only a temporary fix to a growing debt problem across the continent. Portugal and Spain have also seen their debt ratings downgraded.

In economic news, the U.S. Labour Department said new claims for jobless benefits fell lass than expected last week. It also said productivity rose more than forecast in the first quarter, but that was due in part to a drop in labour costs, which is a negative signal for consumer spending. The report comes a day ahead of the government’s April jobs report. It is widely seen as the most important economic report.

Treasury prices rose, pushing interest rates down in the bond market. The yield on the benchmark 10-year Treasury note fell to 3.44 per cent from 3.54 per cent late Wednesday.

Crude oil fell $2.81 to $77.16 per barrel on the New York Mercantile Exchange.

The Labour Department’s weekly report on initial jobless claims showed 444,000 workers applied for unemployment benefits last week. That’s down from a week earlier, but fell short of the 440,000 estimated by economists polled by Thomson Reuters.

It was the third straight weekly drop in new claims, but economists say claims have not yet fallen to levels that would indicate consistent job growth. Initial claims would have to dip to around 425,000 to signal employers are adding jobs. High unemployment remains one of the key issues facing the U.S. economy.

“Even though we didn’t hit a home run with it, we hit a single,” Larry Rosenthal, president of Financial Planning Services in Manassas, Va., said of the report. “This is a process we have to work through. This is a long-term recovery.”

The weekly claims report comes a day before the Labour Department is expected to say the unemployment rate remained at 9.7 per cent in April. An improving employment picture could boost consumer sentiment and make people more optimistic about a recovery.

“It’s a whole lot easier to be confident when you have a job,” said Bryan Hopkins, president of Hopkins Wealth Management Group in Anaheim Hills, Calif.

A separate Labour Department report showed first-quarter productivity rose at an annual rate of 3.6 per cent, better than the 2.5 per cent forecast by economists. The gain was due in part to a drop in labour costs, which means companies should be able to maintain strong profit margins. However, it also means that consumers’ incomes continue to be squeezed, which could slow a rebound in spending.

That slow recovery in spending was seen as retailers provided a mixed picture for April sales. Sales largely slowed from March’s strong pace, partly because Easter was earlier this year. Macy’s Inc. (M-N22.42-0.80-3.45%) was among the retailers that topped forecasts, but its shares still slid. Gap Inc. (GPS-N22.91-1.77-7.17%) and Target Corp. (TGT-N55.02-1.04-1.86%) fell sharply after reporting disappointing monthly sales results.

Overseas, Britain’s FTSE 100 fell 1.5 per cent, Germany’s DAX index fell 0.8 per cent and France’s CAC-40 dropped 2 percent. Japan’s Nikkei stock average, which had been closed the past three days for holidays, fell 3.3 per cent.

Maybe real estate investing is the answer?? Jane

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