Financial Headline News for Wednesday 8/10

All the theorists are out on why the stock market had another wild swing-the bottom line is that the Dow was down 520.

Here we go again-if at first you don't succeed twice try try again for a failed third time! QE3 talk is starting tragically once again to further devalue the dollar.

The European crisis continues to drag on all economies.

Here are the top financial stories of the day:

1) Banks drag Wall Street lower as fear returns-From Reuters

Fear returned to Wall Street on Wednesday, sending the S&P 500 to another 4 percent decline, triggered by worries that Europe's debt crisis could engulf French banks and spill onto the U.S. financial sector.

Trading was once again marked by sharp moves on heavy volume. For a fifth straight day, the Dow industrials fluctuated in a range of more than 400 points.

"What you're seeing is a very short-term, direction-oriented market," said Eric Kuby, chief investment officer of North Star Investment Management Corp in Chicago.

The Dow Jones industrial average slid 520.29 points, or 4.63 percent, to 10,719.48. The S&P 500 fell 51.81 points, or 4.42 percent, to 1,120.72. The Nasdaq Composite dropped 101.47 points, or 4.09 percent, to 2,381.05.

Worries about the strength of French lenders, including Societe Generale, triggered a selloff in European and U.S. banks. Rumors about SocGen's financial health, which the bank denied, sent its shares tumbling 14.7 percent.

An index of European banks dropped 6.7 percent and the KBW index of U.S. bank stocks slid 4.9 percent as fear grew of a possible contagion of any French crisis. Bank of America Corp lost 10.9 percent to $6.77 and Goldman Sachs slid more than 10 percent to $110.34.

Wednesday's drop came a day after stocks rallied on the Federal Reserve's pledge to keep interest rates near zero for at least two more years.

Even after Tuesday's snap-back, the S&P 500 is down almost 18 percent from its 2011 closing high set April 29.

The losses came against the backdrop of recent weak U.S. economic data, the United States losing its triple-A credit rating from Standard & Poor's and the inability of lawmakers to address worries that another recession may be on the way.

Dow component Walt Disney Co dropped 9.1 percent to $31.54 a day after the entertainment company's quarterly results failed to reassure investors that it could do well in a weak U.S. economy.

About 14.8 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, almost double the year's estimated daily average of 7.8 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of more than 8 to 3, while on the Nasdaq, almost five stocks fell for every one that rose.

2) More Fed Bond Buys Hinge on Inflation, Indicators-From The Wall Street Journal

The Federal Reserve put another round of bond buying on the table this week, but a new program may be further off than eager markets expect.

Fed officials would need to see evidence of continued weakening in economic growth in coming months before launching a third round of government-bond purchases. An even more crucial gauge is inflation. The central bank is unlikely to take such a big step, which would probably renew worries about rising commodity prices, without clear signs that inflation is easing.

Worries about a weaker U.S. outlook helped spur the market's severe volatility in the past week and raised hopes for more big action from the central bank. The Fed confirmed some of those fears in its statement Tuesday, acknowledging that growth likely will remain slow well beyond this year, as it pushed plans for keeping its interest-rate target near zero until mid-2013. That move could provide businesses with more certainty and boost their spending and investment as borrowing costs remain historically low.

Fed officials are likely to use speeches in coming weeks to indicate that any new measures depend on the economy's course.

Four words in the central bank's announcement Tuesday—the acknowledgment that policy makers discussed a "range of policy tools"—indicated to investors eager for a government fix to the economy that the
Fed was willing to take further steps. More than anything, markets are expecting a new, third round of bond purchases known as quantitative easing, or QE3.

Goldman Sachs economists said their new "base case" scenario after Tuesday's move is for the Fed to launch new bond buying later this year or next year. But that would depend on the Fed's forecast converging with Goldman's "more downbeat view," they said. The firm sees the unemployment rate flat to rising through the end of next year. The Fed still expects the jobless rate to fall, albeit gradually, through next year.

Nevertheless, the threshold for new action from the Fed has fallen, given its weaker outlook and rising concerns about a further downturn in the economy.

"I don't think the bar is so low to make it inevitable, but it's not like a few months ago where the bar seemed extremely high," said Lou Crandall, chief economist at Wrightson ICAP, a research firm.

A third round of bond buying would likely encourage investors to purchase riskier assets. But the Fed may not need to act immediately to affect the economy. The Fed's reviews of its earlier bond-buying programs found that the anticipation of central-bank action—even before an announcement—helped push interest rates lower.

"Having put that out there, the Fed doesn't have to be in any rush to deliver it," Mr. Crandall said.

Weighing on Fed Chairman Ben Bernanke is the reaction that greeted the second round of bond buying, a $600 billion program that started in November and ended in June. That program drew a global political backlash as it pushed the dollar lower. Some investors and analysts say it contributed to higher prices for commodities such as oil, and the run-up in gasoline prices that weighed on U.S. growth earlier in the year.

Fed officials largely blame strong demand around the world for the jump in commodity prices.

Other options in the central bank's toolbox could be useful, if less powerful. The Fed has indicated that it could lower the interest rate it pays on banks' reserves, a move that could potentially spur banks to put that money to work in the economy. A number of central-bank officials, however, worry that could cause problems in other areas, such as money-market funds, which are already struggling with interest rates so low.

Another option would be for the Fed to shift the holdings in its nearly $2.9 trillion balance sheet to bonds with longer-term maturities. That would avoid boosting the size of the Fed's balance sheet but still lower longer-term rates and help push investors into riskier assets, helping markets.

"If the Fed can ease financial conditions without expanding the balance sheet it will likely run into less political pushback and less confusion about the consequences of policy," Credit Suisse analysts said.

3) Global Banking Crisis Fears Lurch to the Foreground-From CNBC

Fears of a new global banking crisis moved to the foreground Wednesday and are driving investors out of stocks and into safe-haven Treasurys, gold and Swiss francs.

The catalyst was an idea that's been circling markets for several weeks-that France is next in line to lose its triple-A credit rating now that the U.S. has been downgraded.

Even though the three major rating agencies affirmed France's rating this week, the speculation still took a toll on the French banking sector, hurt by rumors of collateral funding issues.

Societe Generale, at the heart of the market talk, denied rumors that it is having problems and reaffirmed that it has low exposure to the weaker eurozone countries. But its shares remained under pressure, as did global bank stocks. German and French stock markets closed down 5 percent.

Analysts are quick to point out that U.S. banks have become much better capitalized than they were during the financial crisis of 2008.

In the U.S., shares of major banks moved sharply lower. Bank of America (NYSE: bac) held an investor conference call Wednesday afternoon to try and reassure nervous investors that it doesn't need more capital. But the market didn't seem impressed.

Meanwhile, JPMorgan Chase (NYSE: jpm) CEO Jamie Dimon told CNBC Wednesday that he is comfortable with the bank's exposure in Europe.

"We've been in Europe for hundreds of years," he said. "We have manageable exposures to all the banks. We're not going to cut and run."

Bank stocks were down about 3 percent in late afternoon trading after being down 5 percent earlier in the day. They now are down more than 5 percent for the week and 14 percent for the month.

Fed Chairman Ben Bernanke was expected to meet with President Obama and Treasury Secretary Tim Geithner to discuss the economy at the White House Wednesday.

Europe's sovereign debt crisis, which has moved from country to country, has been seen as the potential spark for a European banking crisis but European officials have bailed out Ireland, Portugal and Greece and are working to trying to stem the contagion from spreading to bigger countries.

Standard and Poor's, which cut the U.S. credit rating last week, Wednesday said the French sovereign rating is not at risk and that the French government has been more serious than the United States in addressing fiscal issues.

In France, French president Nicolas Sarkozy ordered finance and budget ministers to develop a new deficit reduction program.

The European Central Bank this week was able to slow the spiral of speculation surrounding Italy and Spain by stepping in to buy the debt of those countries. Credit default swaps, which are like an insurance against bond default, rose sharply on Italy, France and Spain Wednesday.

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