Global Recession Fears Shake Stock Market

Updated from 1:45 p.m. EDT

Stocks on Wall Street were rallying from heavy losses but were still mired in negativity Friday afternoon, as forced liquidations continued and fear of a global economic slowdown intensified.

The Dow Jones Industrial Average, off more than 500 points earlier, lately was down 187 points at 8504, and the S&P 500 gave back 21 points to 887. The Nasdaq tumbled 28 points to 1576.

The selling mood was tied to belief in an impending global recession. Larry Adam, chief investment strategist at Deutsche Bank Private Wealth Management, wrote in a research note that he expects 2009 global growth to register at 1.2%, a rate that falls well below the International Monetary Fund's recession benchmark of 3%. He predicted negative growth for the U.S. and Europe in the coming year. " T he present environment remains fluid and unprecedented," Adam wrote.

Adam notes that while the risk of systemic failure has declined, waning confidence among consumers, businesses and investors, as well as panic and ongoing deleveraging, will continue to hurt the global economy.

The slowdown's impact on emerging markets was adding to the concern. The IMF was mulling a plan to issue expansive short-term loans to emerging markets, according to a report by Bloomberg. The loans would total as much as five times member countries' required contributions to the fund, the report said.

Michael Strauss, chief economist and strategist at Commonfund, said that liquidations by funds needing quick capital took place overnight and contributed to a selloff in world markets. An unwinding of carry trades in the foreign exchange market played in to those declines, he said.

"Obviously the U.S. got caught in some of that in the preopening," he continued. Premarket futures for the major averages hit their limit lows before the open, logging their maximum possible losses and triggering a cessation in the selling.

"Maybe this is the final capitulation," said Strauss, who added that the market isn't necessarily reacting to gloomy economic data. "Everyone's expecting the numbers to be weaker. Tell me who's not expecting weaker GDP in the U.S."

Considering the turmoil, Nouriel Roubini, an economics professor at New York University, believes hundreds of hedge funds could collapse and that financial markets might need to be temporarily shut down in order to stem the massive asset selling, Bloomberg reported.

Volatility has reached new heights. The CBOE Volatility Index blasted off to an intraday record of 89.53 and was lately up 18% to 80.

The credit crunch was once again in focus. Bloomberg reported that the Treasury Department was ready to invest in regional banks as part of a $250 billion effort to capitalize banks. The Treasury already dedicated $125 billion on nine of the biggest U.S. banks.

Meanwhile, U.S. equities weren't the only asset class in deep trouble during the final session of the week. Crude oil dropped $3.69 to close at $64.15 a barrel, despite an announcement by OPEC that it would reduce production by 1.5 million barrels a day in an effort to support falling prices. Gold was climbing $14.40 to close at $729.10 an ounce.

After rocketing ahead in early action, longer-dated U.S Treasury securities were mixed. The 10-year note was flat, yielding 3.67%. The 30-year was losing 11/32 to yield 4.07%.

Overseas, European indices, such as London's FTSE and Frankfurt's DAX, were falling sharply. In Asia, the Nikkei in Japan and the Hang Seng in Hong Kong closed with significant losses.

The foreign exchange market was seeing monumental moves in some cases, with the dollar registering significant changes against its major counterparts. The euro was losing 1.8% to $1.32, and the pound was sinking 1.6% to $1.59. The Australian dollar was off 5.1% against the greenback.

However, the dollar was surrendering 1.7% to the yen.

Lending markets slowed a trend of loosening that had emerged in previous sessions. Three-month dollar Libor, a measure of the rate banks charge one another for large loans, was down slightly at 3.52%. The cost of overnight borrowing rose 7 points to 1.28%.

In company news, PNC Financial Services ( PNC) and National City ( NCC) announced a merger agreement. PNC will buy National City for $5.2 billion, $2.23 a share in a cash-and-stock deal. PNC said that as part of the deal it sold $7.7 billion in preferred stock and related warrants to the government.

Elsewhere, U.K. insurance firm Prudential ( PUK) was considering the purchase of segments of struggling U.S. insurer AIG ( AIG). AIG has been attempting to sell parts of its asset portfolio to avoid going bankrupt.

CNBC reported that General Motors ( GM) is ramping up discussions of a potential buyout of Chrysler's auto operations with Chrysler owner Cerberus. Cerberus has also been in talks with Nissan ( NSANY) about a potential deal.

Separately, Chrysler said that, on top of previously announced layoffs, buyouts and voluntary retirements, it will drop 25% of its salaried workers starting in November.

As for corporate earnings, following Thursday's close software titan Microsoft ( MSFT) reported results that beat estimates but issued a cautious revenue forecast for the coming quarter.

Fifth Third Bancorp ( FITB) shares were tumbling following a Goldman Sachs downgrade to sell from neutral.

Looking at the day's economic data, the National Association of Realtors said that September existing-home sales increased 5.5% to an annualized rate of 5.18 million. Economists were expecting 4.95 million.

( Photo gallery: Trading Faces)