New York: US stocks plunged on Wednesday after a shift in how the US government will use its $700 billion bailout fund fed uncertainty and oil prices slid to 21-month lows on fears of a deep global recession.
US Treasury Secretary Henry Paulson said he was backing away from buying troubled mortgage assets and would focus on the capital needs of non-bank financial institutions.
Banking shares took the brunt of the government’s shift in how to address a credit crisis whose genesis lies in the slumping US housing market. Shares of Citigroup fell below $10 for the first time since it became a public company.
The shift in government plans caught investors off-guard.
Paulson’s comments also underscored the head winds the US economy faces, adding to the slide in stocks and feeding a bid for such safe-haven assets as government debt and the yen.
The threat of deflation, which would hurt corporate profits, also slammed stocks and made risk-averse investors steady buyers of US Treasuries.
Sterling tumbled to a six-year low against the dollar and a record trough against the euro after the Bank of England warned the British economy will shrink sharply next year. Its governor bolstered expectations of aggressive interest rate cuts.
The pound traded as low as $1.4898, the weakest level since June 2002, and the US dollar fell sharply against the yen as investors shunned riskier assets.
Oil fell more than 5% to less than $56 a barrel at one point after the US government again chopped its forecast for global demand due to slowing economic growth around the world.
US crude, which peaked at more than $147 a barrel in July, fell $3.17 to settle at $56.16 a barrel, its lowest settlement since January 2007.
Fresh signs of economic weakness also pummeled stocks. The top US electronics retailer. Best Buy, warned that the business climate was the worst in 40 years and said consumer spending is falling fast, adding more evidence of pending economic gloom.
The Dow Jones industrial average closed down 411.30 points, or 4.73%, at 8,282.66. The Standard & Poor’s 500 Index was down 46.65 points, or 5.19%, at 852.30. The Nasdaq Composite Index was down 81.69 points, or 5.17%, at 1,499.21.
The technology-rich Nasdaq marked its lowest close since May 2003, and the S&P’s close was less than 4 points off a 5-1/2-year low.
Shares of Best Buy fell 8%, and the S&P retail index fell 5.8%.
Banking shares fell harder, with the S&P financial index down 6.9%. Bank of America fell 9% and American Express fell 10.5%.
Data from Europe added to the gloom. Euro zone industrial production fell a larger-than-expected 1.6%, while British unemployment rose to its highest level in more than a decade in the three months to September.
The Bank of England said the British economy would shrink sharply next year and inflation could be less than 1%.