New York: US stocks sank on Tuesday as investors dumped risky assets on escalating tensions in the Korean peninsula and as euro-zone debt worries mounted.
South Korea warned of retaliation if North Korea took more aggressive steps after Pyongyang fired artillery shells at a South Korean island, in one of the heaviest attacks in the area since the Korean War ended in 1953. The iShares MSCI South Korea Index Fund fell 5.4%.
The unexpected flare-up increased investor anxiety. The CBOE Volatility Index, Wall Street’s fear gauge, rose 12.3%, its largest daily percentage gain in more than three months.
Jeff Kleintop, chief market strategist at LPL Financial in Boston, said the news reminded traders how easily markets can be disturbed by geopolitics.
“As we move into 2011, (US President Barack) Obama is going to be a lot less focused on domestic policy -- where we have gridlock -- and more focused on foreign policy, and confronting some of these regimes. That might mean higher geopolitical risk premiums going forward,” Kleintop said.
Ireland’s unsteady situation hurt the euro, which also had contributed to the slump in stocks. The equity market’s tight link to the euro has broken of late but resurfaces in times of turmoil. Investors remain concerned about a widening debt crisis on the continent.
The European Union urged Ireland to adopt an austerity budget on time to unlock promised EU/IMF funding, while Irish Prime Minister Brian Cowen rebuffed calls for a snap election and insisted the budget would go ahead as planned on 7 December.
An index of US-traded shares of Irish companies fell 4.9%.
“Now we have sovereigns in trouble being bailed out by essentially super-sovereigns,” US economist Nouriel Roubini told Reuters Insider. “But there’s not going to be anybody coming from Mars or the moon to bail out the IMF or the euro zone.”
The Dow Jones industrial average lost 142.21 points, or 1.27%, to 11,036.37. The Standard & Poor’s 500 fell 17.11 points, or 1.43%, to 1,180.73. The Nasdaq Composite dropped 37.07 points, or 1.46%, to 2,494.95.
Declining stocks far outnumbered advancing ones on the NYSE by a ratio of about 7 to 2, while on the Nasdaq, three stocks fell for every share that rose.
The energy sector of the S&P 500 led declines, down 1.9% as US oil futures prices fell 0.6% to settle at $81.25 a barrel.
Oil giants Chevron and Exxon Mobil, each down about 2%, accounted for 15.5% of the drop in the Dow industrials.
The S&P 500 has found strong support around the 1,175 area. The 23.6% retracement of the index’s 2010 low-to-high gain, last week’s low and its 50-day moving average all coincide near that level.
Market reaction was muted to minutes from the Federal Reserve’s policy-making panel that showed the FOMC considered even more drastic options to stimulate the economy before it settled on buying $600 billion in bonds in a second round of quantitative easing.
Fed officials revised down their forecasts for economic growth next year, and saw unemployment at higher levels than they had the last time they issued official forecasts in June.
Data earlier showed the US economy grew faster than previously estimated in the third quarter, but a slump in sales of previously owned homes in October indicated the recovery remains too anemic to reduce high unemployment.
About 7.6 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below the year-to-date daily average of 8.7 billion.