By Wallace Witkowski and Anora Mahmudova
MarketWatch
Fears of European bank contagion rattle investors
U.S. stocks closed lower Thursday, recovering from session lows, following a selloff fueled by investor worry about European banks and talk of a December rate increase by the Federal Reserve.
Investors were following embattled giant German lender Deutsche BankAG, which has been buffeted by concerns about the health of its balance sheet, specifically its ability to withstand a potential $14 billion fine from the U.S. Justice Department. Deutsche Bank’s U.S.-listed shares DB, -6.67% closed down 6.7%
The Dow Jones Industrial Average DJIA, -1.07% closed down 195.79 points, or 1.1%, at 18,143.45, with the largest decliners being Goldman Sachs Group Inc. GS, -2.75%and Merck & Co. MRK, -2.20% both shedding more than 2%. Earlier, the average was down by as many as 248 points.
The S&P 500 index SPX, -0.93% dropped 20.24 points, or 0.9%, to close at 2,151.13, with all the index’s sectors finishing lower, led by declines in health-care, financial, and utilities shares. Earlier, the index was down by as many as 26 points.
The Nasdaq Composite Index COMP, -0.93% overcame an earlier 64-point deficit and finished down 49.39 points, or 0.9%, at 5,269.15.
The CBOE Volatility index VIX, +2.64% or so-called “fear gauge”, had jumped by as much as 26% earlier, and was last up 15% at 14.28.
By afternoon trading, focus shifted to European banks, following a report that a handful of derivatives-clearing clients had withdrawn excess cash from Deutsche Bank.
Read: Deutsche Bank shareholders in for more pain
“Whenever we hear of a banking risk, people think of a domino effect, it’s in the back of everyone’s mind,” said Karyn Cavanaugh, senior market strategist at Voya Financial. “People are trying to compare it to [the European banking crisis] of 2008 and that’s a little unsettling.”
See: Deutsche Bank crisis threatens to roil global markets
Doubleline Capital founder Jeffrey Gundlach added further pressure on Thursdaywarned investors to keep clear of Deutsche Bank shares and remain defensive in financial markets.
Add to that a continued grilling of Wells Fargo & Co. WFC, -2.07% CEO John Stumpf on Capitol Hill amplified worries over banks, Cavanaugh said.
“It is expected to see Deutsche Bank shares sell off sharply, because a lot of portfolio managers with fiduciary duties have to sell their position in a stock that is problematic,” said Bret Chesney, senior trader at Alpine Global. “However, the broad market is overreacting to such moves in an individual stock, just as it was overreacting to a jump in oil yesterday.”
Busy day for economic data, Fed speakers: Initial jobless claims rose 3,000 to 254,000 in late September, but remained below 300,000 for 82 straight weeks, pointing to a steadily improving labor market.
Meanwhile, revised data suggest that the economy’s performance in the spring was slightly better than expected, as business investment wasn’t nearly as weak as previously reported. The gross domestic product grew a 1.4% pace in the second quarter.
On Thursday, Philadelphia Fed President Patrick Harker said he backs a December rate increase if the economy continues to grow as expected, while Atlanta Fed President Dennis Lockhart said he expects the Fed to be in a position to raise rates soon.
Fed Gov. Jerome Powell, on the other hand, said the Fed can afford to be patient in gradually raising rates as the economy slowly improves.
Markets rallied across Asia and Europe and the dollar trimmed gains againstJapanese yen USDJPY, +0.10% as stocks sold off. The yen is traditionally viewed as place to hide when investors fear economic or global uncertainty.
—Barbara Kollmeyer in Madrid contributed to this article.