-- Financial markets remained volatile Tuesday and resumed their pullback as investors grew fearful that top economic officials updating Congress about efforts to work out a $700 billion financial rescue plan were facing a greater degree of second-guessing from lawmakers than expected.
After days of intense gyrations in financial markets, investors are anxious over whether the plan to absorb bad mortgages and other risky assets will help steer the economy onto more solid footing.
The Dow Jones industrial average fell 161.52, or 1.5%, to 10,854.17 after having risen more than 125 points in the early going and falling as low 177 points. On Monday, the Dow fell more than 370 points as unease over the government rescue plan sent investors scrambling for the safety of hard assets like oil and gold.
Broader stock indicators also fluctuated but turned lower late in the day. The Standard & Poor's 500 index dropped 18.87, or 1.6%, to 1,188.22, and the Nasdaq composite index was dropped 25.64, or 1.2%, to 2,153.34.
Despite the fluctuations, trading appeared more orderly than Monday, when investors rushed into hard assets like oil and gold. Demand remained high for 3-month Treasury bills, considered the safest short-term financial asset, while the dollar regained some ground after being hard hit Monday.
The yield on the 3-month T-bill fell to 0.79% from 0.88% on Monday; last week, it was around zero after investors flooded money into T-bills as the credit markets seized up. That spurred government officials to propose a debt buyout plan.The yield on the benchmark 10-year Treasury note, which trades opposite its price, fell to 3.82% from 3.85% late Monday.
Approval of the federal bailout plan is critical in the minds of investors since there are continual signs the underlying economy is weak, says Peter Cardillo of Avalon Partners. Investors are eager to see whether the plan, which involves spending $700 billion to quarantine bad mortgage-backed investments, will get approved in a form that helps speed up the economy's recovery.
Help may be needed as there are ongoing signs of economic weakness. For instance, holiday sales are forecast to grow at their slowest pace in six years due to the strains of a weak job market and high energy costs, says the National Retail Federation.
And there's still fallout from the financial crisis for investors to deal with. American International Group, the insurance company bailed out last week by the federal government, said it will begin selling assets next week. The insurer plans to raise money to pay back the loan given to it by the federal government.
Some of the intense worries that flared up Monday eased Tuesday. The price of an ounce of gold, which spiked Monday as investors fled the dollar fearing inflation, fell 2.0% to $891.20. Light, sweet crude for November delivery fell $2.76 to $106.61 on the New York Mercantile Exchange. Part of today's decline was due to slightly lower fear of inflation. But a big factor behind Monday's $16 surge was that Monday was the final day for the October contract, leading to increased volatility.
Investors don't want to see any delays in the government's moves to aid the economy, Cardillo says. "There are signs credit markets settled down a little bit. The key is to have confidence return to the financial markets in general," he says
Overseas, Britain's FTSE 100 fell 2.04%, Germany's DAX index slid 0.16%, and France's CAC-40 fell 1.28%. Japanese financial markets were closed Tuesday for a national holiday.