Stocks slammed as Dow erases 2012 gains
NEW YORK Wall Street suffered its bloodiest day of the year Friday as U.S. stocks sank more than 2% following an ugly jobs report. The Dow erased all its gains for the year, and the S&P 500 and Nasdaq moved into correction territory, down more than 10% from the year's highs.
The sell-off was broad, with all 30 Dow components ending in the red, and 97% of the S&P 500 closing lower.
As jittery investors fled stocks, they plowed into the safety of U.S. government debt, pushing the yields on the 10-year Treasury note and the 30-year Treasury bond to fresh record lows.
The Dow Jones industrial average (INDU) plunged 275 points, or 2.2%, the biggest one-day drop since November. The blue-chip index gave up all its gains for the year, and is now 99 points below where it finished 2011. The S&P 500 (SPX) lost 32 points, or 2.5%, and the Nasdaq (COMP) dropped 80 points, or 2.8%.
The S&P 500 and Nasdaq are now down more than 10% from their highs of the year, which means they are officially in what investors call a correction.
"The U.S. employment report was simply terrible," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
The May jobs report showed only 69,000 jobs were added to payrolls, less than half the 150,000 jobs forecast by economists surveyed by CNN The unemployment rate ticked higher for the first time in a year, rising to 8.2%.
Fear and Greed index showed investor confidence sliding even farther into "extreme fear" territory on the news.
Investors run for cover as fear intensifies
"The move in bond markets is even more telling," said Joe Saluzzi, co-head of equity trading at Themis Trading. "A 1.5% 10-year yield? That's fear."
Bond yields have been in record low territory for the past couple of weeks, as fears of Europe's escalating debt crisis have been building. A report on Friday showed the eurozone unemployment rate at a record high of 11%. (Unemployment rate - explain it to me)
Concerns about slowing growth in emerging markets, including China andIndia, have also put investors on edge. Two reports out of China Friday morning showed that the manufacturing sector contracted more than expected in May, fueling investors' concerns that the country may be headed for a hard landing.
As global economic growth has slowed in the last year, exports to Europe -- China's largest foreign market -- have taken a hit as the debt-ridden region teeters on the brink of recession.
"We've got concerns about Europe, China, India, the United States -- this is a global problem," said Saluzzi. "Investors have no place to hide."
Given the growing fears, and fragile market and economic environment, Saluzzi said central banks around the world -- particularly the European Central Bank and the Federal Reserve -- will likely come out with plans to help stimulate the global economy.
Speculation that the Fed will launch a third round of bond buying, or QE3, which is meant to keep long-term interest rates low, has been growing, but Saluzzi is not convinced that it's the right solution.
"Interest rates are already low, and that hasn't worked," he said. "I'm sure the Fed will try something, because that's what it does, but it needs to attack from a different angle."
U.S. stocks finished in the red Thursday, ending a difficult month on a weak note. The Dow and S&P 500 dropped more than 6% in May, while the Nasdaq shed more than 7%.
Economy: Personal income and personal spending for April increased 0.2%. Analysts had expected the figure to increase by 0.3%.
The May installment of the ISM Manufacturing Index showed that U.S. manufacturing growth slowed in May. The index fell to 54.5, down from 54.8 last month and below expectations of 54. Any reading above 50 indicates growth in the sector.
April construction spending rose by 0.3%, but that was below forecasts for a 0.5% rise.
Companies: Shares of Facebook (FB) hit a fresh low of $26.83 Thursday before bouncing back, ending the day up 5% at $29.60. The stock edged higher Friday, closing up 0.1%.
Shares of food producer Sara Lee (SLE, Fortune 500) slipped after the company said it was spinning off its international coffee and tea business, which will pay a special dividend to existing Sara Lee shareholders. Sara Lee also announced a 1-for-5 reverse stock split.
BP (BP) said it was considering selling its 50% stake in TNK-BP, a Russian oil joint venture, after it received an unsolicited bid for the holding. Shares of BP gained ground.
Groupon (GRPN) shares fell. The online discount service, which has been dogged with questions about its accounting practices since its initial public offering in November, ends its lock-up period Friday, meaning that insiders who own shares will be able to sell them.
The nation's Big Three automakers -- General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler -- all reported a jump in car sales in May, but the results were less than expected by some analysts -- another sign that the U.S. economy, while growing, remains weaker than hoped.
World markets: European stocks closed deep in the red. Britain's FTSE 100 (UKX) dropped 0.9%, while the DAX (DAX) in Germany sank 3.2% and France's CAC 40 (CAC40) tumbled 2.5%.
Asian markets ended mixed. The Shanghai Composite (SHCOMP) closed slightly above breakeven, while the Hang Seng (HSI) in Hong Kong slid 0.4% and Japan's Nikkei (N225) fell 1.2%.
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Currencies and commodities: The dollar rose against the British pound, but fell versus the euro and the Japanese yen.
Oil for July delivery slid $3.30, or 3.8%, to settle at $83.23 a barrel.
Gold futures for August delivery rose $57.90 to settle at $1,622.10 an ounce.
EUROPE'S DEBT CRISIS
Spain is the new epicenter of Europe's woes
Spain is fast becoming the biggest threat to Europe's shared currency as the cash-strapped government struggles to contain a growing banking crisis.
The depth of Spain's banking crisis was exposed late last week after the government announced a €19 billion rescue of one of the nation's top lenders, Bankia.
The move raised worries that Spanish banks face larger-than-expected losses on bad loans stemming from the collapse of the nation's housing bubble.
But the Spanish government does not have the money to bail out the entire banking sector, which analysts say could cost upwards of €100 billion. Madrid has already warned that it will miss its targets for deficit reduction this year.
The combination of mounting losses in the banking sector and the government's limited financial resources has raised fears Spain may need to be rescued.
"Spain is now seemingly drifting inexorably to a bailout of one sort or other," said Emily Nicol, an economist Daiwa Capital Markets.
The move raised worries that Spanish banks face larger-than-expected losses on bad loans stemming from the collapse of the nation's housing bubble.
But the Spanish government does not have the money to bail out the entire banking sector, which analysts say could cost upwards of €100 billion. Madrid has already warned that it will miss its targets for deficit reduction this year.
The combination of mounting losses in the banking sector and the government's limited financial resources has raised fears Spain may need to be rescued.
"Spain is now seemingly drifting inexorably to a bailout of one sort or other," said Emily Nicol, an economist Daiwa Capital Markets.
Spain should let its small banks fail
While Spain is not on the verge of insolvency, the government cannot afford to pay interest rates at current levels for very long.
Spanish economy minister Luis de Guindos warned this week that current yields are "not very sustainable over the long term," according to reports.
In addition to the banks, Spain is potentially on the hook for the debts of several regional governments. On Thursday, ratings agency Fitch downgraded eight Spanish autonomous communities, citing larger-than-expected deficits and rising borrowing costs.
The European Union has increased its crisis resources, but the cost to bail out Spain could quickly burn through the region's firewall.
The European Stability Mechanism, a bailout fund that comes into effect this summer, will be equipped with €500 billion.
But the Spanish government has about €800 billion in outstanding debt, said Jay Bryson, global economist at Wells Fargo Securities.
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"The question with Spain is do they help shore up banks or bail out the sovereign," said Bryson. "There's probably not enough political will in Europe to do both."
EU officials could allow the ESM to lend directly to banks, which would take some of the pressure off of the Spanish government to recapitalize the banks. But it remains to be seen if Germany, which has resisted expanding the bailout fund's powers, will back the idea.
The European Central Bank is also under pressure to intervene on Spain's behalf.
On Thursday, ECB president Mario Draghi criticized policymakers in Spain for underestimating the problems in the banking sector, particularly the cost of rescuing Bankia.
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Draghi said the Spanish authorities were reluctant to admit the full scale of the banking crisis, which he said made things worse.
"There is a first assessment, then a second, a third, a fourth," Draghi said. "This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost." The ECB has already funneled more than €1 trillion into the banking system by offering low-cost, long-term loans.
The flood of liquidity helped bring down borrowing costs for euro area governments, including Spain and Italy, as banks in those countries bought billions of euros worth of government debt.
But some analysts say the central bank policy has exposed banks in Spain to potential liabilities if the government is forced to restructure its debts.
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Meanwhile, Spain is also struggling to overcome deep economic challenges as the government imposes additional austerity measures.
Spain slipped back into a recession in the first quarter, and unemployment stands at nearly 25% nationwide.
The unemployment rate in Spain is equivalent to that of the United States at the depths of the Great Depression, said Steven Kyle, a professor of economics at Cornell.
"Even if Spain had a functioning and healthy financial system, it would still be in the midst of a Great Depression," said Kyle
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