By Wallace Witkowski and Polya Lesova, MarketWatch
SAN FRANCISCO (MarketWatch) -- U.S. stocks pared losses Monday
in a dramatic reversal after Federal Reserve officials made dovish
comments on the heels of last week's central-bank meeting and
subsequent market selloff.
Stocks on Wall Street had dropped sharply at the open, with the
Dow industrials falling nearly 250 points after Shanghai stocks
plunged 5.3% on increasing fears over a liquidity crunch in China.
Last week, the S&P 500 fell 2.1% on concerns the Fed will start
pulling back monetary stimulus later this year if the economy
improves further. Read about seven ways to spot a market top.
Substantially paring losses, the Dow Jones Industrial Average
(DJI) was last down 51 points, or 0.3%, to 14,749 after touching an
intraday low of 14,551.27. Ten of the index's 30 components traded
in positive territory.
Hewlett-Packard Co. (HPQ) was the biggest decliner on the Dow,
with shares down 2.9%, followed up by Alcoa Inc. (AA) and Bank of
America Corp. (BAC), with declines of more than 2% each.
Boeing Co. (BA) fell 1.5% after one of its 787 Dreamliner planes
flown by United Airlines (UAL) had to make an emergency landing
Sunday due to a brake problem.
The S&P 500 index (SPX) declined 10 points, or 0.6%, to
1,583 with seven of its 10 major sectors in negative terrain,
following an intraday low of 1,560.31. Materials and financials
posted the biggest losses.
The Nasdaq Composite index (RIXF) fell 14 points, or 0.4%, to
3,336, following an intraday low of 3,242.9. Shares of Apple
Inc.(AAPL) fell 2.6% to $402.76 after Jefferies cut its price
target to $405 from $420, saying the company may slow iPhone
production.
Decliners outnumbered advancers about 5 to 1 on the New York
Stock Exchange and 3 to 1 on the Nasdaq. Composite NYSE volume
topped 3.2 billion shares, while composite Nasdaq volume topped 1.3
billion shares as of 2:30 p.m. Eastern.
Stocks started to pare losses after Minneapolis Fed President
Narayana Kocherlakota said the as long as higher bond yields do not
harden over a long period of time. Also, Dallas Fed President
Richard Fisher said in a Financial Times interview on Monday that
central-bank members fully understood there would be a significant
market reaction to last week's Fed meeting and that big money is
organizing itself like "feral hogs" to test the Fed.
The Fed has fallen short of its inflation and employment
objectives, New York Fed President Willam Dudley said Monday.
Dudley said that Fed policy, while aggressive by historical
standards, is not sufficiently accommodative. Read Dudley's full
speech.
But, it's not all about the Fed. Monday's selloff is a
continuation of renewed concerns over global uncertainty in China,
Japan, and Brazil, said Dan Greenhaus, chief global strategist at
BTIG LLC. "Right now, one has to think this has to be a buying
opportunity," Greenhaus said.
In the U.S. government-debt markets, the 10-year Treasury yield
(10_YEAR), which moves inversely to price, fell 1 basis point to
2.53%, after rising as high as 2.67% earlier in the session.
European stocks tumbled and Shanghai stocks melted down.
On Monday, the Shanghai Composite Index plunged 5.3% to
1,963.24, its first close below 2,000 since December. The
percentage drop was the worst since a 6.7% fall in August 2009.
In fact, Chinese stocks have already ventured into bear country,
noted Andrew Wilkinson, chief economic strategist at Miller Tabak
& Co., with levels about 20% off from highs hit in
February.
A cash crunch in China took a toll on bank stocks. Short-term
interbank interest rates in Shanghai were off last week's highs,
but still above 6% on Monday. China's central bank warned Monday
that banks need to control liquidity better.
The moves in China are not out of character with what policy
makers there have been indicating lately, said Mark Luschini, chief
investment strategist at Janney Montgomery Scott.
"They're steps to moving toward a more market-based economy, and
squashing out shadow-banking activity, which is a potential source
of bad loans," Luschini said.
With China and Fed overhangs on U.S. stocks, Luschini sees a
little more to go in the correction but doesn't expect the pullback
to be in the 10% to 20% range.
Goldman Sachs downgraded its GDP growth forecasts for China to
7.4% and 7.7% for 2013 and 2014, respectively, from 7.8% and 8.4%,
previously. Read commentary: China's alarming credit crunch
"The recent tightening of the interbank market has sent a strong
policy signal that the strong credit growth earlier in the year
will likely not continue," wrote Goldman economist Li Cui in a
note.
In corporate news, shares of Vanguard Health Systems Inc.
(VHS.XX) soared 68% after Tenet Healthcare Corp. (THC) agreed to
acquire the company for $1.63 billion, or $21 in cash per Vanguard
share, marking a 70% premium to Vanguard's Friday close. Shares of
Tenet Healthcare rose more than 4%.
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