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Sum of All Fears: Stocks, Commodities Tumble Over Risk of Recession, European Implosion

Aaron Task
Editor in Chief
Daily Ticker

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An extraordinary day in the financial markets ended with stocks and commodities down sharply while the dollar and U.S. Treasuries rallied, sending the yield on the 10-year note to a record low.

After trading below 10,600 intraday, the Dow closed down 391 points, or 3.5%, to 10,734 while the S&P lost 3.2%. Stocks are now on track for their worst week since October 2008, Dow Jones reports. Meanwhile, gold shed 4%, silver plummeted 11%, copper tumbled 9% and oil fell 6.7% Thursday as traders unwound "risk on" positions funded with "cheap" dollars, which rose 1% vs. the euro.

"Only two positions are working in this market: cash and fetal," writes senior portfolio manager Mark Dow of Pharo Management.

With Americans facing severe pressure from joblessness, falling home prices and stagnant incomes, it's unlikely this latest market tumult will do much damage to already fragile consumers. Still, it's yet another brick in the wall of cynicism and skepticism that's been built around the recovery generally, and the stock market specifically.

Depending on your perspective, the day's action could be attributable to a variety of factors, including:

Disappointment in Bernanke: "Today's market reaction is like a child throwing a tantrum after not getting what it wanted from daddy," gold trader Hal Paxton quipped via Twitter. The Fed's plan to spend $400 billion on 'Operation Twist' and a separate pledge to being buying mortgage-backed securities apparently left some traders wanting more — of what I have no idea. (See: Fed Action Fails To Boost Animal Spirits: "Marginally Helpful," Says Former Fed Governor)

Risks of a Global Recession: Weak purchasing managing index reports out of China and Europe, along with another disappointing U.S. jobless claims report, reinforced concerns about the global economy. "A recession is at this point unavoidable," writes NYU Professor Nouriel Roubini. "Only issue now: Will it be a mild G7 recession or a severe recession plus global financial crisis as bad or even worse than the 2008-09 one?"

Frustration with D.C. Gridlock: After the House voted down a temporary spending bill Wednesday, the U.S. government is at risk of a shutdown if Congress can't agree to a new six-week "continuing resolution" before the new fiscal year begins on Oct. 1. Considering the vote got snagged over essentially how to pay for $3.3 billion of funding for FEMA, it's worth asking if our elected officials haven't entirely gone entirely insane. (See: Totally Absurd: Government May Shutdown Over Funding For FEMA)

Worries about Europe: "The rapidly burning fuse is in the European banking system, particularly in France, and Europe is getting very close to yet another tipping point," PIMCO's Mohamed El-Erian wrote in The Financial Times, which separately reported executives of BNP Paribas plan to tour the Middle East in an effort to raise capital this week.

In the accompanying video, I discuss these and related issues with my Breakout colleague Matt Nesto, who seems to think the buck stops with Bernanke. "You have to say it was the Fed; that was the catalyst for the selling," Nesto says. "People were disappointed, right or wrong. "

My view is that Europe is the bigger issue. Yes, U.S. stocks fell sharply Wednesday following the Fed announcement but the selling accelerated in Europe amid new and renewed fears about the banking system. Once again recalling the dark days of 2008, U.S. financials like Morgan Stanley fell sharply amid concerns about systemic risk and contagion, while the price of default insurance on German and French sovereign debt hit record levels overnight, Bloomberg reports. (See: 2008 Redo? History Doesn't Repeat, But It Often Rhymes)

Notably, the market's only (feeble) rally attempt Thursday afternoon came after an FT report about European officials looking to "speed up plans to (sic) recapitalise the 16 banks that came close to failing last summer's pan-EU stress tests as part of a coordinated effort to reassure the markets about the strength of the 27-nation bloc's banking sector."

That said, there's never any "one" thing that moves the market, or even a rationale needed to explain the moves which, let's recall, follow last week's stirring rally...now a distant memory.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com