US stocks fell on Tuesday, erasing most of the previous session's rally, as worries about Lehman Brothers ability to raise capital and the extent of AIG's mortgage related losses exacerbated broad recession fears. Insurers and banks fell in the aftermath of the government rescue of Fannie Mae and Freddie Mac. Falling oil prices added to worries about the slowing global economy and also dragged on oil stocks. The DJIA closed 280.01 points lower at 11230.73 , the Nasdaq fell 59.95 points to finish at 2209.81 and the S&P500 closed 43.28 points lower to finish at 1224.51. A weak reading on pending home sales in July demonstrated the persistent problems in the housing market, while the battering of AIG and Lehman Brothers reminded investors that the credit crisis is far from over. Meanwhile, regional banks and insurers fell in the wake of the government takeover of Fannie Mae and Freddie Mac.
Lehman Brothers fell 45 percent on worries that its going to have a hard time raising capital now that talks with the state run Korea Development Bank have apparently ended. KDB was thought to be considering buying as much as a 25 percent stake in the troubled bank. Other financial stocks fell heavily, Washington Mutual lost 21 percent, AIG fell 20 percent, Wachovia lost 13 percent and Merrill Lynch lost 10 percent. Citigroup closed 7 percent lower, while Bank of America and Wells Fargo both closing 6 percent lower. Fannie Mae and Freddie Mac both rallied after falling heavily in the previous session.
In economic news, Pending home sales fell 3.2 percent in July after rising in June. Wholesale inventories rose 1.4 percent in July which topped forecasts for an increase of 0.7 percent. June wholesale inventories rose a revised 0.9 percent. Federal officials also warned that the budget deficit will be substantially higher this year, rising $246bn to $407bn, reflecting the tax rebates and an increase in spending.
In company news, Apple announced a new version of iTunes and new models of its iPods. But the shares tumbled on the announcement.
Dell founder Michael Dell bought $100m of Dell shares last week, it was announced after the close on Monday. Shares in the company fell in the afternoon, giving up morning gains.
McDonalds said August sales at its stores open a year or more rose 8.5 percent in the month, topping forecasts. The stock gained 1.6 percent.
Oil prices closed at a 5 month low on bets that OPEC, meeting in Vienna, will hold production levels steady despite the recent price slide. Also impacting oil prices, signs that Hurricane Ike is weakening and is less likely to cause severe damage to oil facilities in the Gulf of Mexico, which accounts for about 25 percent of US oil production.
US light crude for October delivery slid $3.08 to settle at $103.26 a barrel on NYMEX, the lowest close since April 1.
In the bond market, Treasury prices rallied, lowering the yield on the 10 year note to 3.59 percent from 3.67 percent.
The dollar fell versus the euro and the yen.
COMEX gold for December delivery fell $10.50 to $792 an ounce.
The Nikkei average fell 0.4 percent today led lower by exporters such as Canon Inc, on concerns about the global economic outlook and a stronger yen. A fall in oil prices dented energy stocks including oil and gas explorer Inpex Holdings. But banks including Mitsubishi UFJ Financial Group climbed ahead of Lehman Brothers release of its strategy plans and quarterly results later in the day. The Nikkei closed 54.02 points lower at 12346.63, after falling as much as 1.9 percent earlier.
The market's attention was focused on Lehman after the bank's shares plunged more than 45 percent to a decade low on funding worries. Japanese banks rose ahead of Lehman's announcement in what market participants said was unwinding of short positions, as some feared a repeat of the huge rally in financial stocks on Monday after the US government took over Fannie Mae and Freddie Mac.
UK stocks closed lower on Tuesday as falling metal and oil prices dragged on heavyweight commodity stocks, while banks were supported following Washington's plan to take control of Fannie Mae and Freddie Mac. The FTSE100 closed 30.7 points lower at 5415.6.
US crude dropped to a five month low, to weigh on heavyweight oil companies, in expectations OPEC would leave formal output targets steady and as the threat of Hurricane Ike to US Gulf of Mexico energy infrastructure receded. Cairn Energy, Tullow Oil, BP and Royal Dutch Shell fell 1.8-7.8 percent. BG Group slipped 4.3 percent. The company admitted defeat in its $11bn hostile bid for Australia's Origin Energy leaving market players to speculate who BG may target next or whether the company will become a target itself.
Petrofac fell 5.8 percent after Deutsche Bank cut its stance to hold from buy and Goldman Sachs removed the stock from its conviction buy list.
Miners were also lower as metal prices edged down, Kazakhymys, Eurasian Natural Resources, Lonmin, Xstrata and Antofagasta were between 5.7 and 9.3 percent lower.
British Airways, Easyjet and Carnival traded higher on the back of the weakness in energy prices.
Banks pared larger gains made earlier in the session after Lehman Brothers lost more than one third of their value in the US on uncertainty about the bank's ability to sell its asset management business and raise needed capital. However, they still managed to be the top gaining sector, with RBS, HBOS and Barclays gaining between 0.5 and 3 percent. HSBC climbed 1.4 percent. Traders noted talk that HSBC could be eyeing UBS although most dismissed this as unlikely. HSBC declined to comment.
Prudential, Legal and General and Old Mutual were all boosted by the recovery in equity valuations.
Shire closed 2.7 percent lower after Goldman Sachs cut its rating to neutral from buy.
ITV closed 4.1 percent higher on persistent bid speculation and after the company appointed Ian Griffiths, ex finance director of EMAP as new chief financial officer.