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NEW YORK - US stocks fell on Wednesday as plunging gold and oil prices drove energy and mining shares lower, and speculation that Merrill Lynch & Co may need to take more write-downs deflated growing optimism that the credit crisis was abating.
The drop of more than 2 per cent in all three major stock indexes came a day after the S&P 500 rang up its biggest one-day jump in more than five years following stronger-than- expected earnings from investment banks and the Federal Reserve's deep cut in official interest rates.
Gold prices slid in their biggest one-day drop in nearly two years and oil posted its worst slide in seven months, weighed down by persistent worries about the US economy's health. The Standard & Poor's index of materials stocks dropped 6.3 per cent.
A lawsuit filed by Merrill Lynch against a bond insurer fanned speculation the big broker and investment bank may not have enough protection against losses from its exposure to securities at the heart of the credit crisis. That may lead to more write-downs.
'Commodities are also getting tanked here. That's a positive for the market, but it it also hurts energy and other stocks,' said Mr Todd Leone, head of listed trading at Cowen & Co in New York. 'We had a great rally yesterday and probably came too far. There are rumours about Merrill. All brokerage stocks are down.'
The Dow Jones industrial average sank 293.00 points, or 2.36 per cent, to 12,099.66. The Standard & Poor's 500 Index dropped 32.32 points, or 2.43 per cent, to 1,298.42. The Nasdaq Composite Index shed 58.30 points, or 2.57 per cent, to 2,209.96.
Shares of Merrill Lynch fell 11.1 per cent to US$41.45 (S$57.60), a drop that Mr Joe Saluzzi, co-manager of trading at Themis Trading, attributed to rumours about further write-downs.
'Either way something stinks over there and the way the market has been lately ... people shoot first and ask questions later. Nothing has been verified by anybody,' Mr Saluzzi said.
Fear factor
Energy shares were among the biggest drags on the market as the price of oil slid nearly US$5 a barrel after worries about the economy overshadowed bullish weekly data.
An index of energy shares fell 5.4 per cent - its biggest one-day percentage drop since October.
Exxon Mobil shares were the S&P's biggest laggard, falling 4.6 per cent to US$84.43, while ConocoPhillips slid 6 per cent to US$73.61 and Chevron fell 4.9 per cent to US$81.89.
Meanwhile, the Chicago Board of Options Exchange Volatility Index - Wall Street's favorite fear gauge - jumped 15.7 per cent a day after its fourth-biggest daily drop in 14 years.
Shares of Alcoa Inc fell 7.7 per cent to US$35.62 and Caterpillar Inc dropped 4.1 per cent to US$73.73.
A bright spot, though, was provided by the housing sector.
Shares of Fannie Mae climbed 8.8 per cent to US$30.71, while Freddie Mac shot up 14.9 per cent to US$29.90 after they won approval to pump US$200 billion into the distressed US housing market.
Trading was heavy on the New York Stock Exchange, with about 1.97 billion shares changing hands, above last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.32 billion shares traded, above last year's daily average of 2.17 billion.
Declining stocks outnumbered advancers by a ratio of more than 2 to 1 on both the NYSE and the Nasdaq. -- REUTERS
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