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Dow Falls 750 Points

Wall Street faced a frenzy of panic selling Monday amid deepening worries about the financial crisis. Markets in Europe and Asia also tumbled

Investors appeared to be in panic mode Monday afternoon, one week to the day after a vicious market sell-off. U.S. stocks were plunging, with the Dow Jones industrial average falling 750 points to trade well below 10,000, reaching its lowest level in four years. The pace of selling accelerated in late afternoon trading.

Indexes in Europe and Asia also dropped sharply Monday as investors fled equities amid a growing global banking crisis and a freeze-up in credit markets.

Downbeat economic outlooks from Federal Reserve officials and market economists also spooked investors. Uncertainties about the U.S. financial rescue plan were also contributing to Monday’s sell-off, according to S&P MarketScope.

Bonds were higher as the Fed moved to add liquidity to the financial system. The U.S. dollar index was gaining on speculation the European and U.K. central banks will cut interest rates. Gold futures were higher in a flight to safety. Oil futures skidded below $90 per barrel on prospects of lower demand.

At around 2:51 p.m. ET Monday, the blue-chip Dow Jones industrial average was lower by 752.27 points, or 7.29%, at 9,573.11. The broader S&P 500 index shed 86.94 points, or 7.91%, to 1,012.29. The tech-heavy Nasdaq composite index tumbled 166.04 points, or 8.53%, to 1,781.35. The declines followed Friday’s losses of 1.5% for the Dow, 1.35% for the S&P 500, and 1.48% for the Nasdaq.

The selling in the stock market was broad-based. On the New York Stock Exchange, 31 shares declined in price for every one share that gained. The ratio on the Nasdaq was 25-2 negative.

The U.S. VIX equity volatility index, a widely followed stock-market “fear gauge”, hit a fresh cycle high of 56.32 Monday afternoon before retreating back below 54.0.

European stocks plunged as the banking crisis widened. In London, the FTSE 100 index fell 6.88% to 4,637.53. In Paris, the CAC 40 index dropped 8.25% to 3,744.06. Germany’s DAX index sank 6.87% to 5,398.72.

Asian markets finished with sharp losses. Japan’s Nikkei 225 index fell 4.25% to 10,473.09. In Hong Kong, the Hang Seng index slumped 4.97% to 16,803.76.

As traders pondered details of the U.S. bailout plan enacted Friday, they also eyed reports that European banks were considering guaranteeing bank deposits but Germany, France, Britain, and Italy decided against a coordinated bank bailout, while vowing to stabilize markets.

The U.S. dollar index was surging Monday on speculation the European and U.K. central banks will cut interest rates. Bonds and gold futures were higher in a flight to safety. Oil futures skidded below $90 per barrel on prospects of lower demand.

No major U.S. economic reports were scheduled for Monday.

Chicago Fed President Donald Evans, speaking at the National Association for Business Economics annual meeting in Washington, said the U.S. economy faces difficult challenges, and weak growth will probably linger into 2009. Evans said core inflation, at 2.6%, was “too high” and that even as commodity prices fall far off their peak there was still a chance high inflation expectations could become embedded in price- and wage-setting behavior. Evans said real economy activity would stay sluggish into the new year and that the level of uncertainty about the timing of a pickup in growth, which will depend on improvements in the financial and credit markets, “is very high.”

The Fed is doing everything it can to ease the freezing up of the credit markets, said Dallas Fed president Richard Fisher in a Q&A session after his speech before the NABE. Fisher said that the capital markets are operating in “semi-panic, if not outright panic mode” right now.

NABE members sharply lowered their expectations on near-term economic growth, with a stall expected in the fourth quarter. The more negative economic outlook stems from the tightness in credit markets and weakness in consumer spending.

Federal Reserve Chairman Ben Bernanke was set to speak Tuesday at the NABE meeting on Tuesday.

The Fed faces increasing market pessimism about the outlook for the economy. Goldman Sachs economist Jan Hatzius wrote in a note Monday that “with the boost from fiscal stimulus gone and the impact of tighter credit conditions working its way into the real economy, US economic activity has decelerated sharply in recent weeks.” Hatzius adds that the intense distress in financial markets — which seems unlikely to dissipate quickly — “further darkens the outlook.”

As a result, Goldman marked down its forecasts for growth and interest rates substantially. “The recession that we have been forecasting now looks likely to be deeper and longer, taking the unemployment rate to 8% by late 2009 and pushing the Fed to cut interest rates to 1% or lower.”

Chicago Fed’s Evans said he economy faces difficult challenges, and weak growth will probably linger into 2009. Evans said core inflation, at 2.6%, was “too high” and that even as commodity prices fall far off their peak there was still a chance high inflation expectations could become embedded in price- and wage-setting behavior. Evans said real economy activity would stay sluggish into the new year and that the level of uncertainty about the timing of a pickup in growth, which will depend on improvements in the financial and credit markets, “is very high.”

NABE members sharply lowered their expectations on near-term economic growth, with a stall expected in Q4, according to the National Association of Business Economics October outlook. The more negative economic outlook stems from the tightness in credit markets and weakness in consumer spending.

Developments in Europe held the spotlight Monday. During the weekend, leaders of Europe’s four biggest economies — Germany, France, Britain and Italy — decided against a coordinated bank bailout, while vowing to stabilize markets. Italian Prime Minister Silvio Berlusconi later said Italy would revive the idea of a common bank bailout fund at a meeting of finance ministers on Monday. The other three countries shot the idea down. Expectations are building that a meeting of finance leaders from the Group of Seven major industrialized nations, scheduled for this week in Washington, could set the stage for coordinated interest rate cuts.

In the banking industry, France’s BNP Paribas scooped up the assets of Fortis in Belgium and Luxembourg for €14.5 billion to stem a cash drain on Fortis and Dexia. German officials clinched a revised rescue deal for lender Hypo Real Estate that will see commercial banks and insurers provide €15 billion in liquidity, on top of an initial pledge of €35 billion.

The German government will not legislate to formally increase safety for German savers, according to a BBC report. Chancellor Angela Merkel’s commitment was a political one that no German savers would lose any money, according to BBC business editor Robert Preston, who suggested that her undertaking was similar to that offered by U.K. Chancellor Darling. There were fears over the weekend if Germany offered 100% then the U.K. would have to follow. Merkel said over the weekend that all savings were secured.

“If the commitment leads to a change in legislation, or if this is a safety net offered on an ad hoc basis, it seems clear that Merkel’s comments were meant as an effective 100% guarantee for deposits in savings and current accounts, which according to a government spokesman amount to €568 billion,” says Action Economics. The spokesman said that the step was designed to prevent a bank run, says Action Economics.

Sweden, following Germany’s pledge to guarantee private deposit accounts, said it would expand bank deposit guarantees and the central bank increasing the amount of loans offered to its banks. Austria, Denmark, and Ireland issued the first such guarantees last week.

This put pressure on other countries, such as Britain, which face the prospect of a drain in deposits from their less-guaranteed banks.

Iceland’s parliament is expected to adopt financial legislation later Monday geared toward avoiding national bankruptcy, according to comments from Prime Minister Geir Haarde, who detailed unprecedented legislation to authorize government intervention in Iceland’s financial markets. Authorities will be allowed to intervene in bank operations, conduct shareholder meetings and overrule their boards, merge or dissolve firms, forbid asset disposal, takeover assets and migrate housing loans to a government housing entity, among other rights.

“European governments proved unable or unwilling to act together on banking crisis and so will act apart, and therefore potentially exacerbate existing tensions,” wrote UBS Investment Research analyst Meyrick Chapman in a note Monday.

Separately, the Bank of Japan it offered to lend 1 trillion yen against pooled collateral in an auction to inject liquidity into the market and the Bank of England said it would offer $10 billion in an overnight repo operation. South Korea’s finance minister said the country would dip into the world’s sixth-largest foreign exchange reserves to help with loans. Another source of concern is Iceland, where officials, including from the central bank, have been working on a financial stability plan to address a crisis that has sent the country’s currency spiraling lower and is seen as threatening its financial sector.

On Monday, Reuters reported that overnight dollar deposit rates were indicated around 1.0%-2.55% in London, holding close to the Federal Reserve’s 2% target rate and well down from levels of over 10% seen in September after the demise of Lehman Brothers. The ECB and BoE liquidity provisions helped European banks meet their demand for greenbacks to fund their dollar-based liabilities and market exposure.

The cost of borrowing overnight funds on international money markets remained close to central banks’ targets on Monday thanks to continued liquidity injections but lending was virtually non-existent across all maturities.

Meanwhile, in the U.S., the Federal Reserve was pushing Citigroup (C) and rival Wells Fargo (WFC) to compromise over their competing bids for hobbled Wachovia Corp. (WB) that could result in them carving up its assets. Wells Fargo said an appellate court has entered an order vacating New York Supreme Court Justice Charles Ramos’s order of Oct. 4 that granted emergency injunctive relief extending the exclusivity agreement between Citi and Wachovia until further order of court.

Hartford Financial Services Group (HIG) announced a binding deal with Allianz SE (AZ), which provides for a $2.5 billion capital investment. Hartfor said Allianz will buy, at $31 per share, $750 million of preferred shares convertible to common stock after receipt of applicable approvals, $1.75 billion of 10% junior subordinated debentures. Hartford expects an $8.50-$8.80 third quarter loss per share (including $7.05-$7.25 in net realized capital losses), and $1.50-$1.60 core EPS before the effect of a DAC (deferred acquisition costs) unlock.

Fitch downgraded National City Corp. (NCC) and its National City Bank subsidiary’s long and short-term Issuer Default Ratings (IDR). National City Corp.’s long-term IDR has been lowered to BBB+ from A while the bank’s long term IDR has been lowered to A- from A. The bank and holding company’s Individual rating has been lowered to C from B. Fitch placed all ratings on Negative Rating Watch.

Fitch said the near future is unlikely to offer National City Corp. any relief, and may very well result in additional asset quality problems as the economy weakens.

Richard S. Fuld Jr., chief executive of Lehman Brothers Holdings Inc., in his prepared testimony before a House Government Reform Committee, portrayed Lehman Brothers as mistaken in its assumptions about the health of mortgage markets, but also the victim of happenstance and financial markets that eroded too quickly for Lehman executives to contain the firm’s losses.

In other U.S. markets Monday, the 10-year Treasury note was higher in price at 104-17/32 for a yield of 3.459%, while the 30-year bond climbed to 109-23/32 for a yield of 3.944%.

The dollar index was up 0.64 to 81.56.

November West Texas Intermediate crude oil futures were off $4.47 to an eight-month low of $89.41 per barrel amid market worries a global recession will reduce demand.

December gold futures were up $35.80 to $869 per ounce in a flight to safety from a widening credit crisis, which is causing a banking crisis.

Among other stocks in the news Monday, ImClone Systems (IMCL) and Eli Lilly (LLY) announced that the boards of directors of both companies have approved a definitive agreement under which Lilly will acquire ImClone through an all cash tender offer of $70 per share, or about $6.5 billion.

eBay (EBAY) expects to hit the low end of its third quarter revenue guidance, but exceed GAAP and non-GAAP EPS guidance. Separately, EBAY acquired U.S.-based online payments business Bill Me Later for $820 million in cash and $125 million in outstanding options. It also acquired Denmark’s leading online classifieds site for $390 million in cash. The company plans to reduce its global workforce by about 10%, affecting about 1,000 employees, expected to result in pretax restructuring charges of $70 million-$80 million.

Ceradyne (CRDN) announced that it has received a contract for both its XSAPI and ESAPI personal ceramic armor plates from the U.S. Army RDECOM, Aberdeen Proving Grounds, Maryland. Ceradyne said the total amount of contract is approximately $2.37 billion and covers a period of approximately five years.

Original article: Dow Falls 750 Points From businessweek

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