Stocks fluctuate as investors weigh economy

Investors around the world are nervous that the evaporation in available credit in the past month has hurt lending to the point where it will be difficult to avoid recession. But the US government is implementing some of its measures this week to help the banking sector, including a plan to purchase stakes in banks.

Beyond that, investors were cheered after sales of new homes last showed an unexpected increase in September. While median home prices have dropped to the lowest level in four years, investors appeared pleased that the market was beginning to chip away at an inventory glut. The Commerce Department reported that sales of new single-family homes rose by 2.7 percent in September to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from August.

The median price of a new home declined by 9.1 percent from a year ago to $218,400, its lowest level since September 2004.

News that the Treasury plans to start distributing money to major banks this week is offering investors some room for optimism, even as economic worries remain. But investors are worried that the credit crisis has hurt the world's economy.

‘Clearly, what's most important is that the funding crisis needs to be contained at this point,’ said Chris Orndorff, director of equity strategy at Payden & Rygel in Los Angeles.

‘The banks need to start taking on some more risks,’ he said. ‘I think it's going to take months.’

In late morning trading, the Dow Jones industrial average fell 31.86, or 0.38 percent, to 8,347.09.

Broader stock indicators also fell. The Standard & Poor's 500 index declined 6.54, or 0.75 percent, to 870.23, and the Nasdaq composite index fell 15.27, or 0.98 percent, to 1,536.76.

The Russell 2000 index of smaller companies fell 3.04, or 0.65 percent, to 458.02.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 247.7 million shares.

Light, sweet crude fell $1.41 to $62.74 on the New York Mercantile Exchange, while gold prices rose slightly.

Even with several pieces of welcome news, investors around the world remain worried about the prospects for economic expansion. A surge in the yen illustrated investors' nervousness about how much economic activity could slow. Japan's Nikkei 225 index dropped to its lowest close in 26 years as investors worried that the high yen will hurt Japanese exports and further disrupt economic activity. The currency moved to the 93 yen level and near 13-year highs. The yen is seen as a safe haven holding for investors who contend the Japanese economy will fare better in a global recession.

Wall Street appeared comforted by the Treasury's announcement that it signed agreements with nine banks and will buy stock in the companies this week. The proceeds from the stock sales are intended to bolster the banks' balance sheets so they will begin more normal lending and help ease the continuing credit crisis.

The market is facing the uncertainty as it awaits the start of a regularly scheduled two-day meeting of the Federal Reserve. There is speculation that the world's major central banks could announce coordinated rate cuts; the Fed is expected to lower its fed funds rate by a half-point to 1 percent on Wednesday.

The ongoing selling is due in part to the belief that a worldwide recession is likely inevitable, but it's also being triggered by hedge funds and other investors unloading stock because they're being hit by margin calls. In a margin call, a broker who lent money to an investor calls in the loan, forcing the investor to sell stock to repay the loan.

The gyrations in US stocks have been sizable since the market's peak a year ago, but particularly since last month's bankruptcy of Lehman Brothers Holdings Inc. and the government rescue of insurer American International Group. With investors uncertain about the economy, the market appears to be bouncing along a rocky bottom after falling sharply earlier this month.

Investors' nervousness fed demand for the safety of some types of government debt Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.69 percent from 3.72 percent late Friday. The dollar was higher against most other major currencies, except the yen, while gold prices rose.

The yield on the three-month bill, regarded as the safest asset around, rose to 0.84 percent from 0.82 percent late Thursday.

A key bank-to-bank lending rate slipped Monday. The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.51 percent from 3.52 percent on Friday.

While Libor has fallen steadily for over 10 days as confidence slowly returns to the banking system, investors remain skittish. South Korea's central bank cut its key interest rate Monday by three-quarters of a percentage point, its largest-ever reduction. The country's stock market benchmark Kospi ended with a 0.8 percent gain.

Elsewhere, central banks in Australia and Hong Kong added funds to their markets to boost liquidity.

The Nikkei fell 6.4 percent to its lowest level since October 1982, while Hong Kong's Hang Seng Index tumbled 12.7 percent, its lowest finish in more than four years and its biggest single-session drop since 1991.

The sell-off came even as the seven leading industrial nations on Sunday issued a statement warning about the ‘recent excessive volatility’ in the value of the yen. The G7 said it would ‘cooperate as appropriate,’ stirring speculation of an orchestrated intervention to help stabilize currency markets.

Selling spread to Europe when markets opened there. In afternoon trading, Britain's FTSE 100 fell 0.70 percent, Germany's DAX index lost 2.45 percent, and France's CAC-40 declined 3.06 percent.