The Dow Jones Industrial Average fell as much as 500 points on Thursday amid news of declines in Asian and European stocks and ever-growing fears of a second recession. After a late rally, the Dow “only” closed down 391 points. The Standard & Poor’s 500-stock index fell 3.2 percent and the technology-orientated Nasdaq Composite was also down 3.2 percent.
Overall, the Dow has fallen 6.74 so far this week. Its losses on Thursday were preceded by a slump throughout Europe. London’s FTSW 100 index fell 246 points, or 4.67 percent, to close at 5041, its worst fall percentage-wise since March 2009 and its biggest fall in points since November 2008, after the collapse of Lehman Brothers. The German Dax lost 4.9 percent and France’s Cac, 5.2 percent.
Fed Introduces Operation Twist
The Federal Reserve warned that the US faces “significant downside risks” on Wednesday, the day that it unveiled Operation Twist. This plan is intended to stimulate the sputtering US economy by selling $400 billion in shorter-term bonds and using the proceeds for longer-term government bonds. By doing so, the Fed hopes to keep long-term interest rates low in order to boost loans to business and mortgage rates.
But Operation Twist does not inject any new money into the economy, a move that some analysts thought the Fed would make through quantitative easing. The markets indicated that they wanted something more aggressive, as the Dow fell 80 points on Wednesday on the news, followed by a brief recovery — but this was really the start of “massive sell-off” that continued straight into Thursday.
IMF and World Bank Chiefs Call For Quick Action, Say World Economy Is In a “Danger Zone”
On Thursday, the head of the IMF, Christina Lagarde, told a news conference at the organization’s annual US meeting that the “path to recovery is narrower than three years ago” when the economies of industrialized nations sank into recession. Financial leaders need, she said, to take immediate action about “fiscal consolidation, the repair of household debt, and reforms of the public sectors.” The head of the World Bank, Robert Zoellick, also sounded the alarm, saying that the world economy is headed into a “danger zone.” While Zoelick said a double-dip recession is “unlikely” he then added these disquieting words:
“My confidence in that belief is being eroded daily by the steady drip of poor economic news.”
The IMF also lowered growth estimates for the US, Europe and Japan. Data released on Thursday reveals that, for the first time in three years, the private sector in the eurozone contracted and, for the past three months, manufacturing also has slowed in China.
US Treasury Secretary Timothy Geithner pinpointed the eurozone crisis and the political divisions in the US as the greatest threats to the global economy. Noting that, in early 2011, high oil prices and the tsunami in Japan had slowed economic growth, Geither said that these concerns had faded, while the crises in Europe and the US remain as “clouds” and potentially very stormy ones.
A Very Uncertain Future
Investors are speaking of volatility in the markets becoming the “new normal.” Said Louise Cooper, markets analyst at BGC Partners:
“The future is so uncertain – the world could look significantly different in a month’s time. Greece could have defaulted, we could be in the middle of a banking crisis – a bank could have even gone bust.”
NASA’s UARS is predicted to touch down on Earth sometime Friday evening — but how much farther do stocks have to fall before a really big crash occurs?
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