Stock selloff heats up

Stocks tumbled Thursday after a rise in weekly jobless claims sent an alarm ahead of the big monthly employment report.

The Dow Jones industrial average (INDU) lost 188 points, or 1.8% over 90 minutes into the session. The S&P 500 index (SPX) fell 22 points, or 2%. The Nasdaq composite (COMP) fell 43 points, or 2%.

A two-session rally petered out Wednesday after weak readings on the service sector and labor market rattled investors. The selloff picked up steam Thursday after the jobless claims report disappointed investors.

Stock declines were broad based, with 29 of 30 Dow components sliding. Cisco Systems was the lone Dow gainer, up 1.5% following its upbeat earnings report released late Wednesday.

Bank shares tumbled, with the KBW Bank (BKX) sector index falling 2.7%.

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The euro fell to a seven-month low versus the dollar on worries about sovereign debt in Greece, Spain and elsewhere in Europe. The dollar’s strength contributed to weakness in dollar-traded commodity prices and stock.

Meanwhile, the VIX (VIX), Wall Street’s fear gauge, spiked 13%, suggesting investor nervousness was increasing.

Jobs: The number of Americans filing new claims for unemployment rose to 480,000 last week from a revised 472,000 the previous week, the Labor Department reported. Economists surveyed by Briefing.com expected 455,000 new claims.

Continuing claims, the number of Americans receiving benefits for a week or more, rose to 4,602,000 from 4,600,000 the previous week. Economists expected 4,581,000.

The report was the lead-in to Friday’s big January jobs report from the government. Employers are expected to have added 15,000 jobs to their payrolls last month after cutting 85,000 in the previous month. The unemployment rate, generated by a separate survey, is expected to hold steady at 10%.

But the annual revision of U.S. payrolls is expected to show job losses during the recession were a lot more severe than previously thought. The Bureau of Labor Statistics is expected to say that 824,000 more jobs were lost than previously thoug)ht during the April 2008 to May 2009 period.

Factory orders: December factory orders rose 1% versus forecasts for a rise of 0.5%. Orders rose 1% in the previous month.

Quarterly results: After the close of trading Wednesday, tech leader Cisco Systems (CSCO, Fortune 500) reported better-than-expected quarterly sales and earnings.

Toyota Motor (TM) reported improved earnings in its most recent quarter and also lifted its estimates for the fiscal year ending in March. But the results did not include the impact of the huge recall of millions of vehicles due to gas pedal problems. Toyota estimates that the global recall could cost it as much as $2 billion.

On Thursday, the government announced a formal probe into brake problems in the popular Prius hybrid. (Feds probing Prius brakes)

World markets: In overseas trading, Asian markets tumbled and European markets ended lower.

Commodities and the dollar: The dollar gained versus the euro and fell versus the yen.

COMEX gold for April delivery fell $35.50 to $1,075.90 an ounce.

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U.S. light crude oil for March delivery fell $2.30 to $74.68 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices rallied, lowering the yield on the 10-year note to 3.62% from 3.70% late Wednesday. Treasury prices and yields move in opposite directions

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