A political stalemate in Greece rattled financial markets worldwide today, driving US stocks lower.
The euro sank to a three-month low against the dollar and borrowing costs for Spain and Italy jumped as bond traders anticipated that financial stress could spread far beyond Greece.
Investors dumped risky assets and ploughed into the safety of the Treasury market, pushing yields to their lowest levels this year.
The Dow Jones industrial average dropped 125.25 points to close at 12,695.35.
The Dow has lost more than half of its gains for the year in the past two weeks as worries resurface about Europe and the strength of the US economy.
In Athens, talks between political parties to form a government dragged into a second week. The uncertainty has raised concerns that Greece could miss a debt payment and drop the euro.
The worry is that if Greece leaves the currency union, bond traders may demand steeper borrowing rates from other troubled countries and push them deeper into debt.
The turmoil could easily spread to the US through the banking system. “The large banks are globally connected,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “The concrete fear is that if Greece exits the euro, that would hurt European banks. They’ll pull back lending to US banks and then they’d be in worse shape.”
In other trading, the Standard & Poor’s 500 index dropped 15.04 points to 1,338.35. The Nasdaq composite sank 31.24 points to 2,902.58.
The losses swept across the market. All 10 of the industry groups within the S&P 500 fell.
JPMorgan Chase’s two billion dollars trading loss continued to hang over bank stocks. JPMorgan dropped 3% following news that the executive overseeing its trading strategy would step down. Morgan Stanley and Citigroup, two banks with large trading operations, sank more than 4 %.
The loss to JPMorgan appears “manageable,” said Matt Freund, a portfolio manager at USAA Investments. “But people are looking at other banks and wondering who’s going to be next? What else could be lurking?”
Major markets in Europe plunged. France’s CAC-40 and Germany’s DAX lost 2%. Benchmark indexes fell nearly 3% in Italy and Spain.
Traders shifted money into the safest of government bonds, pushing Treasury prices up and their yields down. The yield on the 10-year note hit a low for the year, 1.77 %.
Since hitting its high for the year on May 1, the Dow has been on a steady slide, closing lower on seven of the previous eight trading days. The Dow’s 1.7% loss last week was its worst since December 16.
Despite the broad market decline, some stocks posted gains:
Chesapeake Energy jumped 4 % on reports that billionaire investor Carl Icahn bought a stake in the natural gas company. Chesapeake’s CEO said he would welcome an investment by Icahn, who is known for shaking up companies.
Yahoo gained 2%. The company replaced its CEO, Scott Thompson. Yahoo reportedly pushed Thompson out for padding his resume.
Electronics retailer Best Buy rose 1% after the company’s founder, Richard Schulze, said he would step down as chairman. An investigation found that he knew the CEO was having a relationship with a female employee and didn’t tell an audit committee.