Dow Falls Almost 200 on Eurozone Contagion Fears

The major stock averages all closed nearly 2% lower Wednesday on fears that eurozone debt troubles could impact U.S. bank ratings.

"Stocks are selling off suddenly on Fitch saying that U.S. bank ratings are threatened by eurozone contagion," said Marc Pado, U.S. market strategist with Cantor Fitzgerald, shortly before the markets closed. This is "causing this spike lower."

The Dow Jones Industrial Average tumbled 190 points, or 1.6%, to end at 11,906. The index, which has finished up three of the last four trading sessions, tacked on 17 points on Tuesday amid light trading volumes. The Nasdaq fell 47 points, or 1.7%, to 2640. The S&P 500 was down 21 points, or 1.7%, to 1237.

The Fitch report pushed major bank stocks lower, with Bank of America (BAC)and Citigroup(C) leading in trading volume on the NYSE. Bank of America closed 3.6% lower and Citigroup shares finished the day with a loss of 4.1%.

"Just like the movie Groundhog Day, the market is stuck in a repetitive loop," said Lou Brien, a market strategist at DRW Trading. "Volume continues to be very light in the stock market, which remains vulnerable to news out of Europe. As a result, it appears that few traders are willing to commit to a market opinion for very long. As has been the case frequently of late there is a strong correlation between the dollar/euro and the S&P, with the currency moves leading the way and the stocks dutifully following along, on an intra-day basis."

With the European Central Bank still refusing to act as a lender of last resort, contagion in Europe's bond market threatens to engulf the eurozone's largest economies. Yields on Italian 10-year bonds were back above 7% after an intervention by the European Central Bank to buy up sovereign debt pushed yields briefly below the key threshold in the morning.

Investors! are ner vous that the debt crisis has entered a new, more dire stage given the rising borrowing costs in France and Spain. A downgrade of France, which currently holds a triple A credit rating, would further erode the market's confidence in Europe's emergency rescue fund.

Meanwhile, German Chancellor Angela Merkel reiterated on Wednesday that Germany will resist pressure for the central bank to take a bigger role in stemming the debt crisis. Also weighing down sentiment was a grim outlook for economic growth in the U.K. from the Bank of England.

Bank of England Governor Mervyn King said Britain's economy could remain flat until mid-2012 and that he did not know how Europe would resolve its debt crisis. Bank of Japan Governor Masaaki Shirakawa said that Europe's woes are affecting emerging nations and Japan.

Signs that Italy is taking its debt problems more seriously did little to lift stocks. Italy's Mario Monti formed a new government on Wednesday, bringing the country closer to staving off a potential default. However, investors are hoping that Italy will show further political willpower than a shift in leadership.

On Wednesday, oil prices climbed back above $100 a barrel for the first time since early June. "The WTI-Brent spread should collapse and U.S. oil should be at $110 in the next few months," said Chesapeake Energy(CHK) CEO Aubrey McClendon at the Stephens Fall Investment Conference at the New York Palace Hotel on Wednesday.

The December crude oil contract gained $3.22 to finish at $102.59 a barrel. In other commodities, gold for December delivery fell $7.90 to settle at $1,774.30 an ounce.

"Most of the talk today is about higher oil prices," said Detrick at Schaeffer's, adding that airline companies were facing pressure. United Continental(UAL), Delta Air Lines(DAL) and US Airways(LCC) fell by 5.6%, 5.3% and 5.9%, respectively.Bette r than expected economic data out of the U.S. kept losses in check, as did a Dow Jones report that Federal Reserve Bank of Boston President Eric Rosengren indicated that there could be some coordinated efforts between the U.S. and European central bankers to ensure that the global markets remain liquid as Europe's debt crisis continues.

Industrial production rose 0.7% in October, the Federal Reserve said Wednesday. The reading was better than the 0.4% increase analysts expected, although the previous month's production figure was revised from a 0.2% gain to a 0.1% decline. Capacity utilization came in at 77.8%, slightly higher than forecast and up from 77.4% in the prior month.

Confidence among U.S. homebuilders rose in November, according to the National Association of Home Builders' housing market index, which rose to a level of 20 in November. The reading, although still low, was the best since May 2010 and surpassed the consensus forecast for the level to stick at 18.

The consumer price index edged down 0.1% in October, a welcome surprise given that economists expected the level to sit tight after increasing 0.3% in September. Excluding food and energy, inflation rose 0.1%, in line with expectations.

Signs of easing inflation may give the Federal Reserve more leeway to further stimulate the economy if needed. Market participants often meet the possibility with enthusiasm but as David Semmens, economist with Standard Chartered Bank, notes, "this is Fed friendly data but is going to do little to sway the market one way or the other right now given the focus on Europe."

"Good economic data, especially the 0.7% rise in industrial production, helped lift stocks on the back of a better domestic picture," said Cantor's Pado. But "heading into the end of the day, we fade on fear that we'll have to live through another negative open tomorrow."

European stocks closed lower with London's FTSE off 0.15% and Germany's DAX slipping 0.33%. Overnight, Asian stocks fell for a second d! ay. Japa n's Nikkei Average lost 0.92% and Hong Kong's Hang Seng closed down 2%.

In corporate news, Target(TGT) rose 0.5% after its third-quarter profit topped estimates. The department store retailer posted third-quarter earnings of 87 cents a share, exceeding the average analyst estimate of 74 cents.

Abercrombie & Fitch(ANF) tumbled 13.6% after reporting third-quarter earnings of 57 cents a share, below the average analyst estimate of 71 cents a share.

Dell(DELL) lost 3.2% after it beat third-quarter earnings estimates but failed to meet analysts' expectations on revenue. Dell, the world's third-largest PC maker, reported adjusted earnings of 54 cents a share on revenue of $15.4 billion. Analysts were expecting earnings of 47 cents on revenue of $15.7 billion.

Citigroup(C) slipped 4.1%. The bank is preparing to eliminate 900 jobs in its securities and banking division, or about 5% of the unit's worldwide staff, according to the The Wall Street Journal.

Apple(AAPL) appointed Art Levinson as its new chairman, a role held by Steve Jobs before his death last month. Levinson, the chairman of Genentech, has been a co-lead of Apple's board since 2005, but will now serve as non-executive chairman. Apple also said Walt Disney(DIS) CEO Robert Iger will join its board. Shares fell 1%.

American Airlines parent AMR(AMR) lost 5.2% after failing to reach a cost-saving agreement with its pilots. The lack of a deal raises the possibility that AMR will file for bankruptcy.

Chipmaker Micron(MU) gained 23.4% after chip technology company Rambus(RMBS) lost its antitru! st case against Micron and chipmaker Hynix Semiconductor. Rambus had been seeking $4 billion in direct damages.

The euro was falling to a five-week low against the dollar which strengthened by 0.6% compared to a basket of currencies. In the bond market, 10-year Treasuries added 13/32, diluting the yield to 2.005%.

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