While you were sleeping: US stocks drop, Stanford arrested

Wednesday 18th February 2009

Stocks tumbled on Wall Street, led by banks after Moody's Investors Service said it may downgrade firms with units in Eastern Europe, where it expects the recession to be more severe. General Motors tumbled before its release of restructuring plans needed to secure further government aid.

US stocks declined after the three-day weekend, joining a global slide in equities. The Dow Jones Industrial Average fell 2.4% to 7655.67 and the Standard & Poor's 500 Index dropped 3.4% to 398.6. The Nasdaq Composite fell 2.9% to 1487.67.

GM declined 12% to US$2.19, leading the Dow lower. President Barack Obama's administration hasn't ruled out restructuring GM and Chrysler via bankruptcy procedures, according to White House spokesman Robert Gibbs. A decision won't be made until the companies present their own revival plans.

Obama is set to sign into law his US$787 billion fiscal stimulus package of tax breaks and spending plans to create new jobs and revive the world's largest economy.

Rattling investors, US regulators accused Allen Stanford of a "massive" fraud through his Stanford Group Co. involving the sale of US$8 billion of certificates issued via an affiliate in Antigua. The Securities and Exchange Commission had investigated Stanford Group for almost a year in its second high-profile case after the arrest of money manager Bernard Madoff for an alleged US$50 billion fraud.

American Express slipped 9.7% to US$14.21 after the credit card company said defaults on securitized loans climbed to more than 8% from 7% in December. Prudential Financial Inc., the No. 2 US life insurer, dropped 14% to US$22.82 after being downgraded by Standard & Poor's. Citigroup fell 9.2% to US$3.17 and Bank of America declined 9.3% to US$5.05. JPMorgan Chase fell 9% to US$22.46.

Moody's predicted East European banks will be under "downward pressure" as the recession bites, hurting their parent companies.

In Europe, the Dow Jones Stoxx 600 Index dropped 2.5% to 183.98. Austria's Erste Group Banking and insurance group Wiener Stadtisch tumbled 18%.

The MSCI Emerging Markets Index dropped more than 5% in the biggest tumble since November.

The UK's FTSE 100 Index fell 2.4% to 4034.13, with Lloyds Banking Group falling 8.7%.

Germany's DAX 30 fell 3.4%. Trading company Metro AG fell 7.6% and Deutsche Bank fell 5.8%. Still, investor confidence in Germany had the biggest gain in more than 15 years on optimism about government stimulus efforts and the prospect of record-low interest rates in the European Union.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 5.8 this month from minus 31 in January.

In France, the CAC 40 declined 2.9%, led by a 9.6% decline in Societe Generale and a 7.5% decline for BNP Paribas.

The euro dropped against the US dollar and the yen, sinking below $1.26 for the first time in two months after the Moody's report.

The global stocks rout helped lift the dollar and the yen as investors were drawn to the currencies as a haven.

The euro weakened to $1.261 from $1.2801, and earlier sank as low as $1.2563, the lowest since Dec. 4. It traded at 116.47 yen from 117.46. The dollar rose to 92.34 yen from 91.73.

US Treasury bonds rallied as stocks slumped and commodity prices weakened, as the prospects of a prolonged recession drove some investors to the certainty of debt's fixed payments.

The yield on 10-year Treasuries dropped 22 basis points to 2.67%.

Copper led a decline in commodity prices on speculation demand for the metal used in plumbing and electrical fixtures will wane in the face of a global downturn. Copper futures for May delivery fell 7.2% to US$1.4425 a pound on the New York Mercantile Exchange.

Crude oil sank below US$35 a barrel on the prospects of falling demand for fuel. Crude for March delivery fell 6.9% to US$34.92 a barrel in New York.

The price of gold rallied to a seven-month high as investors sought the precious metal as a haven. Gold futures for April delivery rose 2.7% to US$967.50 an ounce in New York and earlier reached as high as US$975.40.

US homebuilder confidence was little changed at a reading of 9 this month, according to an index compiled by the National Association of Home Builders and Wells Fargo. A reading below 50 on the scale implies poor conditions.

Manufacturing in New York shrank this month at a record pace, according to the Federal Reserve Bank of New York's general economic index, which fell to minus 34.7.

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