US stocks plunge three per cent

US stocks plunged more than three per cent today as a spike in inter-bank lending rates fanned fears about the health of global markets and the US rescue of American International Group (AIG) failed to reassure the market. Anxious investors spent the morning wondering which company might be next to come under serious strain due to tight credit conditions, prompting them to dump financial shares across the board. The S&P 500 financial index slid nearly eight per cent.

Morgan Stanley shares tumbled 32.5 per cent to US$19.37 (Dh71.15) as investors worried whether it would survive as an independent investment bank in the current environment. Shares of the other remaining US investment bank, Goldman Sachs plunged 21.5 per cent to $104.39 after several brokerages cut their profit outlooks for the firm. The S&P 500 sank 4.2 per cent to 1,163.02, its lowest level since May 2005, while the Dow has shed 700 points since the start of the week.

"The fear is, 'Who is next?'" said John O'Brien, senior vice president at MKM Partners in Cleveland. "It almost feels like people scour the books and say, 'Who is the next likely target that we can put a short on?' and that spreads continuous fear." Strategists said the damage threatens to go beyond the financial services sector, hurting the corporate profit outlook and spreading panic among increasingly overstretched consumers. "What does tomorrow bring? Will it start spilling over into consumers? Will there be runs on the banks? There's a million things going on," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets. "Hopefully, we'll see a capitulation soon when everybody throws in the towel," he added. The Dow Jones industrial average was down 352.06 points, or 3.18 per cent, at 10,706.96. The Standard & Poor's 500 Index was down 45.15 points, or 3.72 per cent, at 1,168.44. The Nasdaq Composite Index was down 80.16 points, or 3.63 per cent, at 2,127.74. Also worrying investors was yeserday's news that the Reserve Primary Fund, a money-market mutual fund whose assets have fallen 65 per cent in recent weeks, fell below $1 a share in net asset value because of losses on debt issued by the now bankrupt Lehman Brothers. "Every investor is now questioning each and every investment they have anywhere on the planet," said John Schloegel, vice president of investment strategies at Capital Cities Asset Management in Austin, Texas. "It's leading them to sell anything that has any type of risk ? to sell first. It's an unusual situation we are in right now." A break below important technical support for both the Dow and S&P 500 accelerated the market's slide, traders said. The bank-to-bank cost of borrowing overnight dollars fell more than a percentage point today, but the premium paid for the greenback and sterling over three months swelled, fanning fears that the supply of credit might be drying up in the global financial system. The drop in Morgan Stanley's shares came despite the bank's posting quarterly results after the bell yesterday that beat Wall Street's estimates. The US government agreed yesterday to rescue AIG through an emergency $85 billion loan in return for 80 per cent of the company. The insurance company's shares were off almost 46 per cent at $2.04 on the NYSE. Banks frantically seeking dollar funds have been stonewalled by others increasingly reluctant to lend amid uncertainty and nervousness following the collapse of Lehman Brothers and the bailout of AIG. * Reuters