US stocks dived Wednesday after the Federal Reserve announced new measures to support the flagging economy that left investors cold.
The Dow Jones Industrial Average plummeted 283.82 points (2.49 per cent) to finish at 11,124.84. The broader S&P 500 dropped 35.33 points (2.94 per cent) to 1,166.76, while the tech-rich Nasdaq Composite shed 52.05 points (2.01 per cent) to 2,538.19.
At the end of a two-day policy meeting, the Fed’s Federal Open Market Committee announced plans to shift $US400 billion in its shorter-term debt portfolio holdings to longer-term bonds in a bid to lower long-term interest rates and stimulate the economy.
“The announcement was ill-received on Wall Street, to say the least, with the Dow Jones Industrial Average ending at a session low, and the CBOE Market Volatility Index – otherwise known as the market’s ‘fear barometer’ – tacking on more than 13 per cent by the close,” said Andrea Kramer at Schaeffer’s Investment Research.
Markets had expected the plan, a version of the Fed’s 1961 “Operation Twist,” as well as the Fed’s decision to hold ultra-low interest rates unchanged, but its decision to re-invest in agency mortgage-backed series came as a surprise.
In announcing the new measures, the Fed painted a grim picture of the economy, strapped with slow growth, high unemployment and a depressed housing market.
“There are significant downside risks to the economic outlook, including strains in global financial markets,” the central bank’s Federal Open Market Committee warned in a statement.
Traders also digested a series of Moody’s downgrades on three top US banks – Bank of America, Wells Fargo and Citigroup – saying it saw the US government less willing than before to rescue them if they become unstable.
BofA shares plunged 7.5 per cent, Citi shed 5.2 per cent and Wells Fargo lost 3.9 per cent.
Better-than-expected quarterly earnings drove gains for Oracle, up 4.1 per cent at $US29.50, and for software maker Adobe Systems, which added almost one per cent at $US24.88.
Apple slipped 0.4 per cent. Technology blog AllThingsD, citing sources close to the situation, reported Apple would launch its iPhone 5, the next generation of its smartphone, on October 4.
Hewlett-Packard was up 6.7 per cent amid reports that chief executive Leo Apotheker, who was hired less than a year ago, could be replaced by former eBay chief executive Meg Whitman.
The bond market rallied as investors fled equities. The yield on the Treasury’s 10-year bond fell to 1.88 per cent from 1.95 per cent Tuesday, after earlier hitting a record low at 1.86 per cent.
The yield on the 30-year bond finished at 3.04 per cent, down from 3.21 per cent Tuesday. In intraday trade it slid to 3.03 per cent, its lowest level since January 2009.
Bond prices and yields move in opposite directions.
