US stocks plunge on rising credit anxiety

Wall Street plunged today after a French bank said it was freezing three funds that invested in US sub prime mortgages because it was unable to properly value their assets. The Dow Jones industrials extended its series of triple-digit swings, this time falling more than 380 points.

The announcement by BNP Paribas raised the spectre of a widening impact of US credit market problems. The idea that anyone – institutions, investors, companies, individuals – can’t get money when they need it unnerved a stock market that has suffered through weeks of volatility triggered by concerns about tight credit and bad sub prime mortgages.

A move by the European Central Bank to provide more cash to money markets intensified Wall Street’s angst. Although the bank’s loan of more than 130 billion dollars (£64 billion) in overnight funds to banks at a low rate of 4% was intended to calm investors, Wall Street saw it as confirmation of the credit markets’ problems. It was the ECB’s biggest injection ever.

The Federal Reserve added a larger-than-normal 24 billion dollars (£12 billion) in temporary reserves to the US banking system.

The concerns that arose in Europe and spilled on to Wall Street underscored the potential worldwide ramifications of an implosion of some sub prime loans and perhaps also weakened arguments that strength in the global economy could help keep profit growth going in the US among large companies that do business overseas.

The ECB’s injection of money into the system is an unprecedented move, said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., adding that it shows that problems in subprime lending are, in fact, spilling into the general economy.

“This is a mini-panic,” he said. “All the things that had been denied up until this point are unravelling. On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.”

Retailers released July sales figures Thursday that were overall disappointing.

The Fed didn’t soften its stance on inflation after leaving short-term interest rates unchanged Tuesday. However, the renewed credit market concerns spurred bond traders who bet on its next move to predict early in the session that the Fed will cut rates at its meeting next month. Before Thursday, traders had bet on a 1 in 4 chance of such a cut.

According to preliminary calculations, the Dow fell 387.18, or 2.83%, to 13,270.68. It was the Dow’s biggest point and percentage drop since a market pullback on February 27, that owed in part to concerns about sub prime loans.

Bonds rose sharply as investors again sought the relative safety of Treasurys, pushing down the yield on the benchmark 10-year note to 4.79% from 4.89% late Wednesday.

The broader Standard & Poor’s 500 index fell 44.40, or 2.96%, to 1,453.09. The Nasdaq composite index fell 56.49, or 2.16%, to 2,556.49.