NEW YORK – Wall Street plummeted on Thursday in its second-straight selloff as concerns about the strength of the global economy, and a potential end to Fed bond purchases sent traders darting out of a broad swath of asset classes.
The Dow Jones Industrial Average skidded 354 points, or 2.3%, to 14758, the S&P 500 dropped 40.7 points, or 2.5%, to 1588 and the Nasdaq Composite slumped 78.6 points, or 2.3%, to 3365.
It’s been a manic week for Wall Street. Stocks rallied on Monday and Tuesday ahead of the Federal Reserve’s monetary-policy decision, but then skidded sharply lower Wednesday after Chairman Ben Bernanke’s press conference. That move to the downside ricocheted into global markets, where market participants ditched nearly every manner of risky asset Thursday.
Benchmark stock-market indexes in Japan, China, the UK, Australia and Germany — some of the world’s biggest exchanges — tumbled more than 2% overnight. Gold was crushed, plummeting $87.80, or 6.4%, to $1,286 a troy ounce. Oil slumped $2.84, or 2.9%, to $95.40 a barrel. Even U.S. Treasury bonds, which are generally seen as a safe haven, continued falling, with the 10-year yield rising 0.052 percentage point to 2.418%.
Traders said the dramatic moves were sparked by commentary from the Fed suggesting it will begin paring back its bond purchases later this year, and could halt the buying altogether by the middle of 2014.
“You can’t find one Wall Street trader who thinks the economy can stand on its own without Fed bond buying measures, so what should we expect without QE?” said Todd Schoenberger, Managing Partner at LandColt Capital in New York.
Schoenberger also noted that many companies have gotten a free pass on mediocre earnings because stocks would likely remain strong investments in a near 0% interest rate environment. However, as rates start to rise, and those equities become less desirable, corporate fundamentals look “weak and bleak for the coming quarters.”
Adding to the gloomy sentiment was a closely-watched report from HSBC that showed China’s manufacturing sector contracting in June as output and new orders fell. The gauge slumped to 48.3 for the month from 49.2 in May — striking a nine-month low. Readings above 50 point to expansion, while those below indicate contraction for the factory sector in the world’s No. 2 economy.
“The fall in the HSBC flash PMI reinforces our concerns over the downside risks to the
economy,” Zhiwei Zhang, an economist at Japan-based Nomura, wrote to clients. “We believe the government is committed to tolerating short-term pain to achieve its policy objectives – containing financial risks and secure sustainable growth in the long term.”
There are a slew of U.S. economic reports on tap for later in the day as well.
The Labor Department said new claims for unemployment benefits increased to 354,000 last week from an upwardly-revised 336,000 the week prior. Claims were expected to rise to 340,000 from an initially reported 334,000.
Existing home sales jumped 4.2% in May from April to a 5.18-million unit annualized rate, the highest level since November 2009, according to the National Association of Realtors. Economists were expecting sales to tick up to a 5-million unit rate.The recovery in the housing sector has been seen as a significant brightspot in the overall economic rebound.
“The bottom line is that the housing market remains in a solid recovery phase and all the major indicator… are all performing as well or better than we expected coming in to this year,” Michael Gapen, an economist at Barclays wrote to clients. “We believe the recovery in housing will prove resilient to any broader slowing in the economy and the recent rise in mortgage interest rates, but we will be watching for any signs of weakness or fragility as a result of the significant rise in real interest rates seen over the past two months.”
The Philadelphia Federal Reserve’s gauge of manufacturing activity in the mid-Atlantic region increased to 12.5 in June from -5.2 in May. The index was expected to rise to 1.0. Readings above zero point to expansion while those below indicate contraction.
The Euro Stoxx 50 slid 2.7% to 2613, the English FTSE 100 dropped 2.3% to 6201 and the German DAX sold off by 2.6% to 7986.
In Asia, the Japanese Nikkei 225 fell 1.7% to 13015 and the Chinese Hang Seng plummeted 2.9% to 20283.