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Wall Street slumps on economic fears

By Kiran Stacey in New York

Published: May 21 2009 14:07 | Last updated: May 21 2009 21:51

US stocks fell for a third consecutive session on Thursday on further signs that economic green shoots could wither before flowering into a recovery.

Rumours circulated the market during the day that the US could be next after the UK to have the outlook on its sovereign debt downgraded, and fears over what this could mean for government policy sparked a sustained sell-off.

“A similar move in the US is possible, and that would restrict stimulus efforts,” said Doug Roberts, chief investment strategist at Channelcapitalresearch.com.

Those worries exacerbated anxiousness over the economy after figures showed more people than expected claimed jobless benefits for the first time last week, and the number continuing to claim hit a new high.

Investors were also concerned that manufacturing in the Philadelphia area contracted at a sharper rate than analysts had predicted.

The Vix index, a measure of implied volatility known as Wall Street’s fear gauge, spiked back above 30 as the falls intensified over the afternoon. It climbed 8.1 per cent to 31.39, its biggest daily rise since April 20.

The benchmark S&P 500 index closed down 1.7 per cent at 888.33, the Dow Jones Industrial Average fell 1.5 per cent to 8,292.13 and the Nasdaq Composite index dropped 1.9 per cent to 1,695.25.

“The uptrend was broken a week and a half ago. It may feel like a major pull back but when you think that we rallied from 660 [on the S&P], it doesn’t look so big,” said Marc Pado, chief market strategist at Cantor Fitzgerald.

Regional banks performed particularly badly, with three of the largest selling new shares to boost their capital positions.

Regions Financial fell  16.2 per cent to $4.10 after the company priced the stock sale announced on Wednesday at $4, an 18 per cent discount to Wednesday’s closing price.

Meanwhile, Fifth Thirdwhich the government said needed an extra $1.1bn to survive a severe recession, filed to sell $750m worth of new shares. The stock lost 9.9 per cent to $6.95.

Huntington Bancshares also said it would issue new stock in an effort to raise $675m in “capital actions”. The shares dropped 10.8 per cent to $4.30.

Three companies that provide technology to businesses all beat analysts’ estimates, giving a generally positive snapshot of how corporate America is faring compared with expectations.

Intuit saw sales of its TurboTax tax preparation programme boost revenues and lift earnings above predicted levels. Its shares gained 8.1 per cent to $27.27.

Meanwhile, Computer Sciences saw its profits more than double, even as revenue fell, helped by tax benefits. The shares climbed 7.5 per cent to $39.95.

NetApp also beat earnings estimates and the stock rose 3.1 per cent to $17.88. The company also announced it would buy Data Domain, its rival data storage company, for $1.5bn. Shares in Data Domain surged 34 per cent to $24.

There were some positive signs on consumer activity as Limited Brands and Hormel Foods reported better earnings than expected.

Limited Brands made a surprise profit, and raised its full-year outlook, sending its shares up 0.9 per cent to $11.76. The company, which owns the Victoria’s Secret underwear line, said cost cuts had mitigated the impact of falling sales.

Hormel Foods, which owns Spam and other food products, also beat analysts’ expectations with higher profits. The company said customers were choosing to eat at home rather than restaurants, which helped stabilise revenues. The shares gained 2.1 per cent to $33.65.

But Gamestop, one of the world’s largest video game retailers, gave up 15.5 per cent to $22.38 after slumping sales caused the company to miss analysts’ estimates.

Nick Kalivas, an analyst at MF Global, warned investors should not get carried away with the marginally positive signs on consumer and corporate health. “Economic growth is not as strong as the market is pricing – the retail environment is still tough, and the industrial and technology sectors are uneven,” he wrote.

General Motors jumped 32.4 per cent to $1.92 after the United Auto Workers Union agreed to cut its labour costs and changed the terms of $20bn in debt for retiree healthcare.

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