Updated from 10:30 a.m. EDTStocks on Wall Street recovered from the worst of a massive early selloff Friday, but the major indices remained deep in the red as credit-crisis induced fears continued to weigh on investor sentiment. Trading was exceedingly choppy. The Dow Jones Industrial Average plummeted nearly 696 points early and briefly broke below the 8000 level, only to recover just as sharply and briefly touch positive territory. Lately, however, the index was trading down 463 points, or 5.4%, at 8117. The S&P 500 staged a similar comeback, though it was lately down 53 points, or 5.9%, at 857. The Nasdaq was 72 points lower, or 4.4%, at 1573. Financial stocks, at the forefront of investor skepticism thanks to nearly dry credit markets, experienced mixed trading in the highly volatile session. Battered financial firms Morgan Stanley ( MS) and Goldman Sachs ( GS) were again in focus. Ratings agency Moody's said it may cut Morgan Stanley's credit rating, and lowered its credit outlook for Goldman to negative. Following a heated battle with Citigroup ( C), Wells Fargo ( WFC) appeared set to buy Wachovia ( WB) unencumbered. Citigroup said it will continue to pursue $60 billion in damages for breach of contract but would not try to overturn a merger between Wells Fargo and Wachovia. Citi had announced a Wachovia acquisition on Sept. 29, only to trumped days later by a new bid from Wells. The Journal also reported that insurance firm AIG ( AIG) took out an additional $9 billion in government loans, bringing its total borrowing from the U.S. in the past three weeks to $70.3 billion. The company continues to attempt to sell its assets in a struggle to stay afloat. Bank of America ( BAC) shares were edging higher following reports that it may sell a portion of its 11% stake in China Construction Bank. The banking titan also appeared set to carry out its acquisition of Merrill Lynch, despite declines in both firms' stock prices, according to a report in the Financial Times.
Amid the increasing concern about banks, the U.S. government was considering guaranteeing bank debt and insuring all domestic bank deposits, according to a report in The Wall Street Journal. The report precedes a meeting of the Group of Seven industrial nations Friday. The economic powers plan to discuss a coordinated response to the global credit crisis. Japan's finance minister, Shoichi Nakagawa, said that his country would propose an international fund to secure emergency loans for nations suffering under the current credit squeeze. Triple-digit declines can't happen every day, said Paul Mendelsohn, chief investment strategist Windham Financial. He said that if the market can catch a bid into the weekend, there could be a major shift in trading psychology. He said that the G7 meeting offers hope for additional international support in the face of the credit crisis. "I think they have to backstop the banking system," he said. Traders were closely eying an auction of credit default swaps related to bankrupt brokerage Lehman Brothers. The auction is expected to bring heavy losses to sellers of the swaps, which function as insurance against a default on company defaults on their debt. The market for these derivatives has been tied up as credit markets showed at best a mixed reaction to internationally coordinated rate cuts initiated earlier in the week. E. William Stone, chief investment strategist at PNC Wealth Management, wrote in an email newsletter that the declines over the previous nine days are comparable to the two-day market crash of 1987, as both center around derivative products. He pointed out that a recovery from the 1987 crash took less than two years. Three-month dollar Libor, a measure of the rates banks charge one another for large loans, climbed to a new high of 4.82%, although rates on the nine- and 12-month maturities were declining. The cost of overnight borrowing, which has been highly volatile in recent weeks, declined by more than half, to 2.47% from 5.09%.
Earnings season continued amid the financial turmoil, as industrial bellwether General Electric ( GE) reported third-quarter earnings that declined 12% year over year but were in line with revised estimates. As for analyst actions, Wells Fargo, along with insurance and credit services firms such as State Auto ( STFC), Erie Indemnity ( ERIE), Donegal Group ( DGICA) and Advanta ( ADVNB) all caught upgrades from Stifel Nicolaus. Looking at economic data, the Census Bureau's report on the trade balance for August showed a deficit of $59.1 billion, whereas the economy registered a $62.2 billion deficit in July. Economists had anticipated an August deficit of $59 billion. The Bureau of Labor Statistics also reported that export prices excluding agricultural goods declined 1% in September. Import prices excluding oil dropped 0.9%. In commodities, crude oil was down $5.86 to $80.73 a barrel. Gold was climbing $14.10 to $900.60 an ounce. Longer-dated U.S. Treasury securities were falling. The 10-year was down 22/32 to yield 3.87%, and the 30-year was declining 16/32, yielding 4.13%. The dollar was climbing vs. the euro and pound, but falling against the yen. Overseas, European markets were taking it on the chin. The FTSE in London and the DAX in Frankfurt were both down sharply. In Asia, Japan's Nikkei and Hong Kong's Hang Seng also closed with broad losses.