China’s surprise decision to raise interest rates took a toll on global markets as concerns mounted the move would slow the country’s economy and have a ripple-down effect. With the foreclosure crisis keeping investors on tenterhooks, Beijing’s decision to tighten rates came at a rather inappropriate time. The Dow average dropped below 11,000 for the first time since August.
The blue-chip index fell 165 points, or 1.5%, to 10978. The broader S&P’s 500-stock index dropped 19 points, 1.6%, to 1165.90. The tech-heavy Nasdaq Composite index, weighed down by Apple (NASDAQ:AAPL) and IBM (NYSE:IBM), dropped nearly 44 points, or 1.8%, to 2436.95. Declining issues beat those that rose in price by a five-to-one margin.
As investors adjusted their risk portfolios, the prices of government bonds rose while the dollar had its best day in more than two months. Dollar rose 1.7% against a basked of currencies. Gold prices dropped 2.6%.
Stocks slumped in the early afternoon, led by financials, after reports surfaced that a group of major investment firms were forcing Bank of America (NYSE:BAC) to buyback $47 billion in mortgage-backed securities issued by its Countrywide Financial unit.
Reports said a consortium of major investment firms including Pimco, BlackRock (NYSE:BLK), TCW and MetLife (NYSE:MET), along with the NY Federal Reserve Bank were attempting to force Bank of America to buyback almost $47 billion in bundled mortgages put out by Countrywide Financial, which was bought by BoA in 2008.
The decline was broad based, with only two of the thirty DJIA components managing to close in the green. Intel (NASDAQ:INTC) edged up 0.1% after the company said it plans to spend at least $6 billion over the next several years in building manufacturing facilities. Coca-Cola (NYSE:KO) was another gainer, up 0.6%, after the company reported that volume growth above long-term targets had driven profits 8% higher during the third quarter. The company also said it plans to buyback shares worth $2 billion this year. Pulling the DJIA lower were Bank of America, off 4.4%, and Alcoa (NYSE:AA), down 3.6%, on China demand-related fears.
All ten S&P500 industry sectors fell Tuesday, led by a 2.7% decline in basic material shares and a 2.5% drop in oil and gas sector shares. China’s announcement sent oil prices down $3.59 to $79.49. Among the sector declines, tech and health care sectors fell 1.8%; consumer services and industrials 1.5%; financials 1.4%; telecommunications 1.3%; consumer goods 1.1%; and utilities 0.6%.
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