The market slumped at the opening bell following more troubles for Countrywide Financial, worse than expected housing data, and as traders accelerated unwinding of yen carry trades.
The Dow dropped as much as 343 points after the Philadelphia Federal Reserve Bank said its business activity index was at 0.0 in August versus 9.2 in July. The report indicated factory activity in the Mid-Atlantic region is stagnating. Economists polled by Reuters had forecast a reading of 9.0.
When the market was sharply lower, major indices like the S&P 500 had fallen 10% from the late July highs bringing the market into an official full fledged "correction", defined by many as a decline of at least 10%. A bear market is defined as a market dropping more than 20% from its high.
Housing starts showed a slump of more than 6% in July versus expectations for a decline of about 4%. Starts are now at the lowest level in 10 years, while building permits tumbled to the lowest point in 11 years.
That news further fanned fears about mortgage lending and the condition of credit markets amid troubles at Countrywide Financial . The nation's largest mortgage lender said it drew down an entire $11.5 billion credit facility to bolster its liquidity, as a shortage of credit weighs on the mortgage industry.
Countrywide's move to tap a financial lifeline sparked quick reaction from credit ratings agencies. Moody's Investors Service downgraded Countrywide's senior debt three notches to "BAAA3," its lowest investment grade, and said a cut to junk status was possible. Fitch Ratings cut the debt to "BBB-plus," its third-lowest investment grade.
Moody's and Fitch also cut ratings on Residential Capital, lowering GMAC's home lending unit to junk status. Rescap is 49% owned by General Motors.
Turmoil in the credit markets sparked a further reversal of the yen carry trade as traders sought to unwind risky positions. The yen surged against the dollar as traders unwound the carry trade by buying back Yen.
Risk aversion was also reflected in bond market money flows where three and six month Treasury-bill yields tumbled, indicating a flight of capital into short term Treasurys.
"Clearly the flight of money into the short end of the yield curve indicates a lot of fear," said Andrew Bekoff, chief investment strategist at Printz Capital Management. "The message here is there is a fear of a systemic problem. Whether its legitimate, or not who’s to say."
In corporate news, biotechnology company Amgen slumped after it said it would cut up to 14 percent of its work force, or 2,600 jobs. The company also lowered its profit guidance because of slimmer than expected sales of its anemia drug Aranesp.
J.C. Penney profit inched up 1.7 percent to 81-cents a share, helped by back-to-school sales and the introduction of new private-labelbrands. Penney's earnings beat analyst estimates by 4-cents a share.
Kraft Foods is looking to sell its Post cereals business, which owns Grape Nuts and Shredded Wheat brands, the Wall Street Journal reported on its Web site on Thursday.
European Stocks Tumble
European shares took another big step lower Thursday.
French President Nicolas Sarkozy added political weight to the credit-related concerns by saying authorities need to be "very vigilant" of market corrections, in a letter to German Chancellor Angela Merkel dated August 15.
Sarkozy also fired a warning shot at credit-rating agencies, which are at the center of the subprime valuation problems.
"We must question the role of rating agencies in identifying risks," Sarkozy told Merkel.
The comments come as the European Commission planned to review the voluntary code that credit rating agencies use to signal to investors the amount of risk associated with various assets, a senior Commission source told Reuters on Thursday.
The overwhelming negative sentiment left very few stocks in positive territory on the London FTSE-100, Paris CAC-40 and Frankfurt DAX, which all made triple-digit losses.
Investors dived out of stocks and into short-term government bonds, sending the yield on the German Schatz and 2-year gilts sharply lower.
Solid earnings from Zurich Financial Services didn't keep shares of the Swiss firm in the green. Zurich beat expectations with a 33% rise in first-half net profit and said it had escaped the subprime crisis, but the stock dropped 1.7%.
Meanwhile, Swiss specialty chemicals company Ciba missed forecasts with a second-quarter net profit decline of 45%, due to restructuring costs. Shares in the company fell 6.8%.
And in economic news, euro-zone consumer-price inflation fell 0.2% on the month and rose 1.8% on the year in July, which is well within the European Central Bank's target and in line with analysts' forecasts.
Asian Stocks Selloff
Stocks in Asia were hammered Thursday as currency carry trades were unwound, while emerging market bonds, stocks and currencies were dumped in favor of safe-haven government bonds amid worries about spreading U.S. subprime mortgage problems. Australia and Japan suffered triple-digit losses with South Korea taking the worst beating.
Seoul shares, including blue chips such as Samsung Electronics, suffered their biggest drop in five years as fears about global credit markets sparked a selloff in a market that only three weeks ago hit a lifetime high. The KOSPI plummeted 6.93%.