US Stocks Slammed by Italy’s Fears

A trader works on the floor of the New York Stock Exchange before the closing bell on November 9, 2011 in New York City. The Dow finished down 389.24 points to close at 11,780.94 following news of Italian bond yields rising. (Mario Tama/Getty Images)

NEW YORK—Major U.S. stock indices dropped precipitously on Wednesday as European sovereign debt worries shifted from Greece to Italy.

Investors punished markets globally on new fears coming from Europe, where Italy’s 10-year bond yields increased to above 7 percent, a level which is considered to be a breaking point and has caused other sovereigns—such as Portugal and Ireland—to seek a bailout. The rise in yield is due to a fall in bond prices, and British clearinghouse LCH.Clearnet is requiring higher margins from traders holding Italian bonds.

Italian Prime Minister Silvio Berlusconi agreed to step down on Tuesday, amid pressure from other nations and investors to slash Italy’s budget. But his resignation did little to calm global markets. A team of representatives from the EU arrived in Rome Wednesday to monitor Italy’s budgeting efforts.

“Given the country’s enormous funding needs relative to the size of the Euro-zone rescue fund, this turn of events poses a serious challenge to the two-week-old European plan to come to grips with the long-festering sovereign debt crisis,” Sheraz Mian, director of research at Zacks wrote in a research note Wednesday. Italy is Europe’s third-biggest economy, and most economists agree that it would be too large to be bailed out by Europe alone without outside assistance.

All major U.S. indices shed more than 3 percent. The Dow Jones Industrial Average fell 389 points, or 3.2 percent, to below 12,000 points. The S&P 500 Index dropped 46.8 points, or 3.7 percent, and the Nasdaq Composite Index declined 105.8 points, or 3.9 percent.

In Europe, the FTSE 100 stock index in London dropped 1.9 percent, while the DAX index in Frankfurt fell by 2.2 percent. The benchmark Europe Stoxx 50 dropped by 2.3 percent in comparison. Commodity futures such as gold, silver, and oil all declined.

The euro currency dropped against the dollar, to $1.3541, while Spanish and French bond yields also increased on contagion fears.

The biggest losers are among banks holding European sovereign debt securities. Shares of Morgan Stanley & Co. fell 9 percent, or $1.56, while shares of Goldman Sachs Group Inc. dropped 8.2 percent on Wednesday. Bank of America Corp. and Citigroup Inc. also fell on Wednesday.

Shares of automaker General Motors dropped 11 percent after the Detroit-based company announced that net income in the third quarter fell by almost 6 percent, and fourth quarter income would be relatively flat, citing a stronger U.S. dollar and sagging demand in Europe. 

Adobe Systems Inc. also saw its shares tumble by almost 7.7 percent after it announced layoffs totaling more than 750 across its U.S. and European operations. In addition, Adobe slashed its fourth quarter earnings forecast.