The market ended this holiday-shortened week the same way it started: In free fall over concerns about Europe.
The Dow tumbled 304 points, or 2.7%, to 10,992 after trading as low as 10,936 intraday. The S&P fell 2.7% and the Nasdaq shed 2.4%, wiping out weekly gains generated by Wednesday's big bounce.
Meanwhile the yield on the 10-year Treasury tumbled below 1.90% intraday, the lowest level since World War II, before settling at 1.92%. After falling sharply early Friday, gold rebounded to end the New York session slightly despite the dollar's strength vs. the euro, another sign of investors seeking a haven from the unrest in financial assets. (See: Marc Faber: Gold is "Dirt Cheap" — Could Hit $10,000 per Ounce)
The proximate cause for Friday's rout was the surprise resignation of ECB board member and chief economist Jurgen Stark. The resignation leaves the ECB board with only one German, Jens Weidmann, spurring speculation of a massive upheaval in the eurozone.
"The announcement fuels two paths of speculation," writes BTIG chief global strategist Dan Greenhaus. "Either the Germans are slowly laying the groundwork for removing themselves from the eurozone or pressure from Germany will eventually lead to the ouster of Greece from the zone."
Despite repeated protests to the contrary from Greek policymakers and politicians, the odds heavily favor the latter outcome. Greek debt yields surged again Friday to almost 98% on the 1-year note and the price of default insurance also jumped. Notably, Stark's resignation followed a Bloomberg report Germany was preparing a bailout fund for its banks in the event of a Greek default.
"We may finally be reaching a point that some in Europe are finally realizing that the money being funneled to Greece to buy time from the inevitable would be better put to use to recapitalize banks to insulate them from sovereign haircuts," writes Miller Tabak equity strategist Peter Boockvar.
My Breakout colleagues Matt Nesto and Jeff Macke join me in the accompanying video to discuss these and related developments, including:
- The significance of the correlation among S&P 500 stocks hitting all-time highs.
- The likelihood of a "major" policy intervention from the G7 confab this weekend.
- The relative outperformance of the Nasdaq vs. the S&P, generally, and of semiconductor stocks, specifically.
- The outlook for Fed action at the Sept. 20-21 policy meeting and whether Bernanke & Co. have any "bullets" left.