Wall Street sell-off led by financials

Financial stocks led US equities to their worst day in more than a month on Tuesday amid signs that the effects of the financial crisis are still being felt.

Banks suffered after the Congressional Oversight Panel, the body that runs the Troubled Asset Relief Program, warned the US Treasury had not done enough to relieve them of toxic assets.

JPMorgan fell 3.4 per cent to $41.24 while Citigroup snapped a seven-session winning streak, giving up 6.4 per cent to $3.69.

Meanwhile two of the companies worst affected by the crisis also fell sharply on fresh worries about their finances.

CIT, the commercial lender that narrowly staved off bankruptcy last month, sank 18.9 per cent to $1.20 after the company delayed its second-quarter report, warning it might still go bankrupt if it cannot complete its debt tender or raise money in another way.

Struggling bond insurer MBIA suffered a downgrade from JPMorgan, which said the company may be overwhelmed by losses from risky mortgage securities, leaving little value for shareholders. The stock fell 12.6 per cent to $5.39.

The benchmark S&P 500 index closed 1.3 per cent down at 994.35, on a day when trading in certain shares, including those in Warren Buffett’s company Berkshire Hathaway, was halted for almost four hours after a computer problem,.

The Dow Jones Industrial Average fell 1 per cent to 9.241.45 and the Nasdaq Composite index dropped 1.1 per cent to 1,969.73.

“After a near-50 per cent rally off the lows this pull back is both normal and expected,” said Jordan Smyth, managing director of Edgemoor Investment Advisors. “It is not necessarily the start of a steep decline.”

The falls came in spite of figures showing productivity among non-farm workers in the second quarter rose more than economists had expected while the costs of that labour fell.

But experts warned such savings may not inflate profit margins.

Paul Ashworth, senior US economist at Capital Economics, said: “Are companies really going to put these cost savings into margins? My conclusion would be that they are going to use them instead as a tool to cut prices.”

There was further pessimism from data showing companies cut inventories much more sharply than expected last month, apparently holding out little hope for a bounce in demand.

Wall Street was also waiting for the statement from the Federal Reserve, whose Open Market Committee (FOMC) began its two-day meeting on Tuesday to discuss interest rates and the future of quantitative easing.

With many on Wall Street predicting little change in policy, investors were waiting to see what tone the committee would strike on the health of the economy.

Meanwhile companies sensitive to the US consumer suffered on a second bearish day for cyclicals.

Sprint Nextel, the mobile phone operator, lost 4.3 per cent to $3.55 after Piper Jaffray downgraded the stock, warning of continued loss of customers.

That came after Sprint announced on Monday night that it would increase a current debt offer to $1.3bn, which would take its debt load to $21bn.

Yum Brands, which owns Pizza Hut and Taco Bell, also saw its shares downgraded, with UBS warning about sluggish sales in the US. The stock fell 3.8 per cent to $35.13.

But investors were happier about signs that the battle over Target, the value retailer, may be cooling after Pershing Square, whose manager Bill Ackman lost a proxy contest to elect new directors earlier this year, cut its stake to 4.4 per cent. Target picked up 0.5 per cent to $42.20.

The ongoing delays to President Barack Obama’s healthcare reforms meant health insurers, which stand to see government subsidies cut under the proposals, were one of the few sectors to show strength.

UnitedHealth rose 2.8 per cent to $27.82 while Coventry Health Care climbed 1.6 per cent to $22.52.

Shares in Fluor, the engineering company, fell after it announced lower revenues than expected. Even though it made better profits than forecast and maintained its outlook, the stock lost 6.1 per cent to $53.96.