Wall Street | The seeds of the next free world recession

Wall St in biggest plunge since GFC

• Brendan Conway
• From: Dow Jones Newswires
• August 05, 2011 6:23AM

Traders watch as Wall St plunges 4.3 per cent. Source: AP

US stocks plunged this morning in the biggest sell-off since the financial crisis, driving the Dow Jones Industrial Average down more than 500 points, as investors appeared to lose faith in the ability of the world's policy makers to revive the global economy and stave off a rolling debt crisis in Europe.

The Dow kept cascading lower throughout the session. It finished just off the lows with a 512.76-point decline, or 4.31 per cent, to 11,383.68, erasing all its gains for 2011.

The slump of the past few weeks has driven the Dow down more than 10 per cent from its May intraday highs -- putting the index officially in correction territory.

It was the measure's biggest single-day loss since December 1, 2008, when the Dow plunged 679.95 points at the height of the financial crisis, one of the market's worst days ever.

The Standard & Poor's 500-stock index fell 60.27 points, or 4.78 per cent, to 1200.07. The S&P and Nasdaq Composite also moved into correction territory. The Nasdaq slumped 136.68 points, or 5.08 per cent, to 2556.39.

The Australian dollar fell more than US2 cents in early trade to $US104.60 from $US106.89 cents yesterday.

Investors across the globe have been buffeted by economic and political turmoil in recent days.

In the US, fears have turned from worries about a possible default by the US government to a weakening economic outlook. A string of data have pointed to a slowing of the recovery and investors are bracing for the closely watched non-farm payroll report today.

In Europe, leaders are struggling to contain a growing debt crisis. Investors are increasingly worried troubles are spreading to Italy and Spain, driving down stocks across the region and sending borrowing costs of peripheral nations soaring.

On the floor of the New York Stock Exchange, the mood was sombre and tense.

"There is no reason to buy US cash equities," said Doreen Mogavero, president of Mogavero Lee & Co "(Investors have) come to the point where we find out we could be looking at ten more years of austerity."

In the US, all the blue-chip Dow stocks were lower as investors sold across the board. All the S&P 500 sectors were in the red and just three of the 500 stocks rose. Aluminum producer Alcoa was the hardest hit blue-chip stock, plunging 9.3 per cent, followed by Bank of America, which fell 7.4 per cent.

"This is a fear-driven market. We're in a mini-free fall. It's not a Black Monday, or Black Thursday, but it's in pretty bad shape -- all the big stocks are being liquidated," said Christian Thwaites, president and chief executive at Sentinel Investments.

Gold and silver, which had been up on the day, reversed course as investors sold the metals to meet stock-based margin calls, traders said. If investors have purchased stocks with borrowed money, they often have to front more cash when the price of those shares fall, known as a margin call.

Underscoring that worried investors are increasingly seeking cold cash, the Bank of New York was preparing to charge some large depositors to hold their funds. The biggest US custodial bank said this week in a note to clients it would begin slapping a fee next week on customers who have vastly increased their deposit balances over the past month.

The bank cited the massive US dollar deposits it has received over recent weeks, as investors and corporations retreat from financial markets amid Europe's debt crisis and the recent debate over US government borrowing.

Investors fled to US Treasurys, sending the yield on the 10-year Treasury note, which falls as prices rise, down to 2.460 per cent, the lowest since October.

Fretting about a slowdown, investors also were focused on a pair of policy moves abroad that did little to assuage their immediate worries.

In Europe, the European Central Bank moved to reactivate two of its anti-crisis measures in an attempt to stop the currency bloc's sovereign-debt woes from spreading to Italy and Spain. Japan intervened in currency markets to curb the strength of the yen, which has risen as investors shift into currencies considered safer assets.

"The concern is that you're seeing visible worry by government officials, by central bankers. The (worry) is, 'Are there any bullets left in the government arsenal to help'?" said Russ Koesterich, iShares Global Chief Investment Strategist at Blackrock. "Investors are realising that the economy is very fragile, (but) it's not clear that governments are able to do much help."

In his press conference, ECB President Jean-Claude Trichet acknowledged downside risks to growth in the region, saying economic risks "may have intensified" and that recent data showed the growth pace in Europe has decelerated.

The ECB left key interest rates unchanged. Mr Trichet's comments on the weakening economic recovery prompted the central bank to resume its program of government bond buying for the first time in five months. But traders said the central bank was only buying Portuguese and Irish sovereign bonds, a decision Mr Trichet acknowledged was not "unanimous".

"You've got a weak economy, the aversion of a debt crisis but not a solution, and you've got the rest of the globe starting to implode in a lot of areas, especially Europe," said Barry James, president and chief executive of the James Advantage Funds. "It's natural that people would react with fear."

Additional reporting: Saabira Chauduri, Steven Russolillo, Tomi Kilgore, Ishaq Siddiqi and Jonathan Cheng