Dow Plunges 357 as Crisis in World Markets Deepens

Global stock markets went into a near-panic mode on Thursday as Russia’s ruble collapse, the apparent gridlock in Japan over a financial bailout plan and deflationary fears fed by a downdraft in commodity prices spurred selling worldwide.

The Dow Jones industrials plunged 357.36 points, or 4.2%, to 8,165.99, the biggest one-day decline since a 554-point plunge last Oct. 27, amid the second heaviest trading in Wall Street history. U.S. bonds soared as investors perceived them as the only haven in a chaotic market.

But the selling was even worse overseas: Tokyo’s Nikkei stock index fell 3% overnight to 14,413, as investors despaired of any imminent cure for Japan’s sick financial system. In afternoon trading today, the Nikkei was off 2.6%, to 14,033--its lowest level since 1986. South Korean stocks also dropped 3.42% early today.

Traders fretted that today could spell more trouble in the U.S. market too. Several said the lack of a full-out panic--coupled with the fact that the market was heading down at Thursday’s close and ended at its low for the day rather than bouncing back--made them worry about a continuation or even a worse sell-off.

“I think we might get caught,” said Joseph A. DeMarco, chief trader for HSBC Asset Management in New York.

The major Latin markets plunged dramatically. Brazil’s stock index fell 10% and Mexico’s dropped 6.1% as fears deepened of currency devaluations, which would lead to higher inflation, economic stagnation and stock losses.

In Moscow, the stock market plunged a record 17.1% on the Russian Trading System to 63.2, the lowest since the index was created three years ago. The index stood at 500 a year ago.

European markets, which have greater ties to the Russian economy than does the United States, suffered steep losses for a second straight day. Frankfurt’s DAX index fell 3.2%, London’s FT-SE 100 fell 2.2%, and the CAC-40 in Paris fell 3.6%.

And world crude oil prices fell more than 2% as Russia’s economic woes heightened expectations that the country will boost oil exports to raise cash, adding to a global glut, and that an agreement among producing nations to cut output might fall apart.

“The Russians are really fighting for hard currency,” said Mike Schnitker, an energy derivatives trader at Citibank NA in New York. “They’ll try to do anything they can to shore up their economy.”

Fears of the onset of a deflationary cycle and a global recession drove other commodity prices down. Gold fell, with December futures closing down $5.80, or 2%, to $280.10 an ounce, close to an 18-year low of $277.50, and natural gas dropped 5%. The Commodity Research Bureau Index, a closely followed commodity barometer, fell to the lowest closing level since December 1977.

Russia Still Key Destabilizing Factor

Although a string of worrisome events is fueling the financial contagion now spread to most corners of the globe, the main destabilizing factor at the moment remains Russia, which simultaneously devalued its currency and defaulted on $40 billion in government bonds last week.

Investors are still not sure how much they will lose on their Russian bonds, but the damage could exceed 70% of the bonds’ face value.

Russia is threatened with imminent economic collapse and political disarray. Fear of instability in the nuclear-armed country was heightened by Thursday’s rumors, later denied by the Kremlin, that President Boris N. Yeltsin was resigning, which touched off the market nose dive from the opening bell.

But traders on the floor of the New York Stock Exchange said that as bad as Thursday was, there was no feeling of a stampede, in which investors ditch stocks at any price and the fear is palpable--or at least audible.

“When there’s real panic, you can sense it in the pitch of the voices down here. There’s an involuntary higher pitch,” said Arthur Cashin, PaineWebber’s veteran chief of NYSE floor operations. “We didn’t see that today.”

Much of the overseas hit stemmed from fund managers and institutions fleeing risk wherever they perceive it, said James Barrineau, equity strategist with Salomon Smith Barney in New York. Emerging markets especially suffered.

The Russian disaster is causing investors to “reconceptualize the global market as a place where sovereign defaults are possible,” Santander Investment chief economist Lawrence Goodman said. And that’s forcing a sell-off in stocks, especially in regions such as Latin America, where several governments are under increasing pressure to devalue.

Uncertainty Likely to Stay for Awhile

Collective depression seemed to settle over Mexico as the peso touched a record low of 10 to the dollar briefly, before closing at 9.97. The peso was down 1.8% from Wednesday, and it has fallen 10% this month alone.

A return to normalcy is not expected any time soon. “Until there is some certainty on how bad people will get hurt in Russia and whether Latin governments can withstand the storm , we don’t see this phenomenon settling down,” Barrineau said.

The Wall Street carnage, which left the Dow down 12.6% from its mid-July record high, frightened even some analysts who until now have been relatively sanguine. The average U.S. stock fund now has turned negative year-to-date, wiping out the last of investors’ profits from the big first-half rally.

The Dow, which at the July peak boasted an 18.1% gain for 1998, is now just 3.3% higher for the year.

Banks that could lose money on loans to Russia were among the biggest losers of the day, with Dow component JP Morgan plunging 11.2 %. The bank accounted for more than 52 points of the Dow’s drop. Citicorp and Chase Manhattan were also hurt badly, losing about 9%.

Russian problems are hurting Western financial institutions, and economies as a result, said Tony Dwyer, chief equity strategist at Ladenburg Thalmann & Co.

European Economy Seen as Pivotal

The damage to European markets, meanwhile, raised concerns about the economies that, along with the United States, have been a source of global economic strength.

“One of the helping forces in offsetting the problems in Asia has been the strength in the European economy. If you get less lending in Europe, that may cut into economic growth in Europe, which cuts into U.S. economic growth,” Dwyer said.

No market was immune to the contagion, which gripped markets heretofore perceived as healthy. In Germany, stocks dropped 3.3%, and in Canada, where the government took the extreme measure of raising interest rates to protect the currency, stocks fell 6%.

Exacerbating deflation and depression fears, a key commodity price index sank to a 21-year low, suggesting that investors are fearing a replay of the 1930s economic collapse, when currency devaluations and falling prices ravaged nations and businesses.

U.S. bonds soared, pushing 30-year yields to a record low, as plunging financial markets around the world drove investors to the relative safety of U.S. Treasury securities.

“People are selling everything but U.S. government bonds,” said John Burgess, who manages $90 billion in fixed-income assets at Bankers Trust Global Investment Management.

Banking shares in Mexico were hammered again as the Bank of Mexico announced new measures to raise interest rates in a bid to stabilize the peso. Mexico’s average interbank interest rate soared 5.84 percentage points Thursday to 37.59%. The rate has climbed 11.74 percentage points in the last week.

In response to the sliding peso and the inflationary pressures it could unleash, the central bank imposed new measures Wednesday night to increase its control over short-term interest rates.

The bank raised the minimum deposit that commercial banks must keep in the central bank, and also increased the number of daily currency auctions from one to three, giving it more flexibility to intervene in the market.

Mexican stocks plunged 6.1% Thursday, with banking shares hit hardest in the worst one-day fall since Oct. 27, 1997. The benchmark index closed at 3055.71, its lowest level in two years. Short-term interest rates again surged, with one-month government bonds rising 2.5 percentage points to 32.33%.

Contributing to this story were Times staff writers James Smith in Mexico City, Tom Mulligan in New York and Tom Petruno in Los Angeles.

Get updates on the world markets throughout the day on The Times’ Web site: http://161.35.110.226/quote

ROCKED BY THE RUBLE

How would markets have fared since Russia developed the ruble on Aug. 17, through Thursday’s closing:

Russia: -67%

Japan: -2%

Germany: -7%

Mexico: -14%

U.S.: -5%

****

INSIDE

* SEEKING UNITY: Lowly bank CDs begin to look good to nervous investors. D1

* FUND LOSSES: Thursday’s market plunge left the average U.S. stock fund with a year-to-date loss. D1

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Dow This Year

The Dow has fallen sharply since July but remains ahead for the year.

Thursday: 8,165.99

Source: Bloomberg Financial Service

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Dow by the Hour

Thursday’s Dow Jones industrial average at 15-minute intervals:

Wednesday’s close: 8,523.35

Open: 8,515.00

Close: 8,165.99

Change: -357.36

Source: AP research