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Dow Drops 350 Points Following Turmoil in Many Global Markets

By Sharon Walsh
The Washington Post

Bad economic news ricocheted around the globe Thursday, from Japan to Russia to Europe and then to Latin America, finally exploding in U.S. stock markets and sending the Dow Jones industrial average plunging more than 350 points to close at 8,165.99. The 4.2 percent drop was the largest since October's dive of 7 percent.

Markets around the world were battered before U.S. traders were at their desks. Foremost among the concerns of analysts and economists was Russia's financial crisis. The economy there is in massive disarray. The Central Bank has suspended trading of rubles for dollars, the country has stopped repaying foreign loans, and the stock market has essentially evaporated.

Asked to sum up the distress in the market, Carol Stone, deputy chief economist at Nomura Securities International, replied: "Well, there's Russia, and then there's Russia, and then there's Russia."

Russia's economic crisis has been growing steadily worse since President Boris Yeltsin's government allowed the ruble to be devalued on Aug. 17. The ruble, which was trading at 6.3 to the dollar as recently as two weeks ago, was being traded on the street Thursday for nearly twice that much with Russia's major currency trading system shut down.

While U.S. exposure to Russia's economy is not large in terms of exports, investors and analysts expect the crisis will spread to other economies, including emerging markets and important U.S. trading partners such as Latin America, and ultimately hurt the United States.

Investors, including European banks who bought Russia's high-risk short-term debt because of high returns, now face the prospect of huge losses. Many of those investors were highly leveraged and are having to sell U.S. stocks to cover their foreign losses.

"Russia is basically gone as an investible area," said John L. Manley, an equities strategist at Salomon Smith Barney. "The problem with this market is that there are no secrets. One day, the Russia problem isn't even on the radar screen, the next it's in your face."

The fear in the markets is that Russia is the first domino in a line of troubles. With Russia essentially defaulting on its debts, investors in emerging markets like Latin America will demand higher rates to compensate for risks there, pushing fragile economies deeper into crisis. Then U.S. banks and U.S. companies with international exposure will see profits suffer.

Other world indices showed painful signs of international economic uncertainty. Japanese markets closed at their lowest level in more than six years as Japanese officials disagreed over how to fix the country's banking system. German markets were down 4.5 percent and London markets, Europe's largest, were down 3.2 percent.

No U.S. market and no sector of the market was left unscathed Thursday. Dow Jones stocks that declined outnumbered those that gained by 2,872 to 360, and a hefty 934.6 million shares traded compared with 671.9 million Wednesday. Thursday's loss took the market to levels more than 10 percent below its July 17 high, making it an official "correction" in the parlance of Wall Street.

The Nasdaq composite index, heavily weighted with technology stocks, took a beating, losing 81.72 points to close down 4.6 percent. The Standard & Poor's 500 index plunged 41.60 or 3.8 percent.

The market drubbing that has occurred in the last several weeks left the Dow, once up 18 percent, up just 3.3 percent for the year. The average stock on the New York Stock Exchange is down 32 percent from its highs, said Manley.

Analysts who only weeks ago were suggesting that Federal Reserve chairman Alan Greenspan raise interest rates to head off an overheated economy now predict that the Fed may soon lower rates.

"I think the Fed will be forced to lower rates," said Anthony Conroy, chief equities trader at Bankers Trust Investment Management, whose comments were interrupted by his shouts of "I want to sell as much as I can! Sell it!. It's unbelievably hectic here," he said.