Equities fall in US on EU banker resignation

Traders and guests watch the ringing of the opening bell at the New York Stock Exchange, September 9, 2011 [Reuters]

US stocks tumbled more than two per cent after the top German official at the European Central Bank stepped down.

Juergen Stark resigned in protest over the bank’s bond-buying programme, which has been a major tool in fighting the region’s debt crisis.

Stark’s departure throws into question policymakers’ ability to deal with Europe’s debt crisis, a problem that could engulf a world economy already teetering on the brink of recession.

Investors’ rising fears were highlighted by a 12 per cent jump in the market’s main measure of expected turbulence, the VIX volatility index.

The VIX neared 40, close to its highest level this year, as it marked its biggest jump in three weeks.

“Stark’s resignation is suggesting that there is a lot of pressure being built in the senior levels in the ECB,” said James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

“There is an increasing realisation that this is a major solvency issue in the banking system.”

Doubts about US President Barack Obama’s $447bn stimulus proposal added to the negative sentiment, with investors unconvinced his administration has the tools to revive the flagging US economy.

The sell-off was broad and on solid volume, as all 10 S&P sectors were in the red and more than 80 per cent of stocks listed on the New York Stock Exchange fell.

Unnerving traders further were unconfirmed terrorism threats against New York City and Washington just ahead of the 10th anniversary of the September 11 attacks.

“There is an extreme amount of negativity,” said Sam Ginzburg, a senior trader at First New York Securities.

Big declines

The Dow Jones industrial average dropped 303.68 points, or 2.69 per cent, to 10,992.13, as the S&P 500 Index dropped 31.67 points, or 2.67 per cent, to 1,154.23.

And the Nasdaq Composite Index dropped 61.15 points, or 2.42 per cent, to 2,467.99.

The ECB has been buying up sovereign bonds to help hold down borrowing costs in some debt-strapped eurozone members, and the programme has been considered critical to arresting market contagion.

The resignation of Stark, who will step down by the end of the year, may deepen the gulf between the ECB and German guardians of central banking orthodoxy.

At a meeting of finance chiefs from the Group of Seven wealthy nations being held in France, US Treasury Secretary Timothy Geithner on Friday pressed Europe’s strongest economies to give “unequivocal” financial support to weaker eurozone states to overcome a debt crisis that threatens the world economy.

The S&P 500 ended the week 1.7 per cent lower and is now down 8.2 per cent this year.

Shares of some big companies fell after Obama’s speech did not address proposals to allow large, multinational companies to repatriate an estimated $1.5 trillion of overseas profits to the United States at a reduced tax rate.

“These are software companies, pharma companies that have billion of dollars stranded overseas,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

“It’s a disappointment that we didn’t see a definitive package on bringing those profits back home.”

Among stocks that would benefit from such a move, Xerox Corp fell 5.5 per cent to $7.41 and Hewlett Packard fell 5.1 per cent to $22.65.

Shares of Bank of America Corp, where officials discussed slashing roughly 40,000 jobs during the company’s first wave of a restructuring, slid 3.1 per cent to $6.98.

McDonald’s Corp fell 4.1 per cent to $84.02, as the world’s largest hamburger chain reported a lower-than-expected rise in worldwide August sales at established restaurants on a steep drop in Japan and a lull in new product launches in the US.