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The Dow came back from a 300-point decline, but remained stuck deep in the red, as traders mulled euro zone sovereign debt and economic fears.
As of 3:40 p.m. ET, the Dow Jones Industrial Average sunk 163 points, or 1.5%, to 11,078, the S&P 500 tumbled 15.7 points, or 1.3%, to 1,158 and the Nasdaq Composite slumped 24.9 points, or 1%, to 2,456. The FOX 50 fell 12.6 points to 836.
Energy shares like Halliburton (NYSE:HAL), financials such as Bank of America (NYSE:BAC) and industrials including Boeing (NYSE:BA) sustained some of the biggest losses. The financial sector was hit especially hard after investment bank Nomura downgraded its price target on a dozen American banks.
However, the healthcare sector was only down modestly. Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE), for example, were the only two blue chips in the green.
Europe's sovereign debt crisis has sparked concerns on Wall Street in recent months, and has once again pressured world markets. Several euro zone countries such as Greece and Italy have high levels of public debt as compared to total economic output, prompting concerns over how they will be able to pay back their debt, especially considering a weaker global economic situation.
Greece has already needed two rounds of emergency bailouts from other euro zone countries and the International Monetary Fund. However, recent doubts over the Mediterranean country's commitment to austerity measures, an important contingency of the bailout, have increased the risk that some lenders may refuse funding. Indeed, the rescue has sparked political fights in Europe's economic powerhouse, Germany.
Thousands protested in Italy on Tuesday against a roughly $64 billion austerity package that is being debated in Senate there. The country, which has $2.6 trillion public debt, agreed to eliminate its deficit by 2013 in exchange for the European Central Bank making large-scale purchases of its debt to cut down borrowing costs. Initially, it seemed as though the package would easily pass, but recent political drama has made the passage more questionable.
Yields on the debt euro zone countries that are perceived to be weaker such as Greece, Spain and Italy have climbed markedly, indicating traders are pricing in a higher level of risk. In turn, this has pressured European banks like RBS (NYSE:RBS), Deutsche Bank (NYSE:DB) and Credit Suisse (NYSE:CS) that hold sovereign debt of these countries as assets.
Wall Street is coming off of a steep, two-day losing streak, in which the blue chips have shed 373 points, or 3.2%. The U.S. has gotten a stream of data points that have painted a grim picture for the world's largest economy.
Indeed, the closely-watched monthly unemployment report released on Friday showed the economy added no new jobs, compared with expectations of a 75,000 net increase.
As a result, many investment banks have repeatedly pared down projections for economic expansion, and some have said a double dip recession is a distinct possibility. Goldman Sachs, for example, wrote a research note to clients over the weekend reiterating its call that the chances of a double dip recession are "about one in three."
Global shares were sharply lower Monday, with the MSCI Europe index plunging 4.2%, and Germany's DAX nose diving 5.3%. Asian markets fared slightly better, with the Japanese Nikkei 225 shedding a relatively mild 1.9%. The selloff continued in Japan on Tuesday, with the Nikkei dropping another 2.2%, but European shares were mixed. Italy's blue-chip index, the FTSE Mib, dropped as much as 2.6% to the lowest level since 2009, according to Reuters.
The yield on the benchmark 10-year Treasury bond briefly fell to a record low of 1.92%, but has since bounced back to 1.97%. Bond yields trade inversely to prices, meaning falling yields indicate increasing demand, highlighting Wall Street's flight to safe-haven assets.
Gold has had a volatile session. The precious metal fell $3.60, or 0.19%, to $1,873 a troy ounce.
The economic calendar is fairly light this week, however, the markets will receive a considerable amount of information from the Federal Reserve. The central bank's beige book, which provides anecdotal information from each of the Fed's districts, is slated for release on Wednesday. Fed Chairman Ben Bernanke is also expected to give a speech on Thursday that will likely be watched closely on Wall Streets.
Market participants will be waiting to see if the Fed chief hints that the central bank will provide additional monetary easing at its two-day meeting that starts on September 21. Bernanke, and several other Fed officials, have indicated that policymakers are considering ways to loosen monetary policy further in light of strengthening economic headwinds. With short-term interest rates already at the lowest possible level, the Fed has had to develop unprecedented methods to stimulate the economy and buoy the financial system.
The service sector continued expanding modestly in August, according to a private survey. The Institute for Supply Management's non-manufacturing gauge rose slightly to 53.3 from 52.7, topping estimates of 51. Reading above 50 point to expansion, while those below point to contraction.
Economists were cautiously optimistic regarding the report: "The resilience in the August ISM non-manufacturing survey is indicative of a U.S. economy that continues to expand, rather than one slipping into a new recession," economists at Nomura wrote in a research note, adding the service sector added the majority of jobs in August.
In energy markets, crude fell 43 cents, or 0.19%, to $86.02 a barrel. Wholesale RBOB gasoline slipped 2 cents, or 0.6%, to $2.82 a barrel.
Prices at the pump have been stable since last week. A gallon of regular costs $3.66 on average nationwide, down from $3.67 last month, but well higher than the $2.68 drivers paid last year.
The English FTSE 100 gained 1.1% to 5,157, the French CAC 40 slumped 1.1% to 2,966 and the German DAX shed 1% to 5,194.
In Asia, the Japanese Nikkei 225 slumped 2.2% to 8,590 and the Chinese Hang Seng rose 0.48% to 19,711.