U.S. stock futures drop as global financiaal system risks grow

U.S. stock-index futures dropped, signaling the Standard & Poor's 500 Index may fall for a fourth day, amid concern global economic growth is slowing and that banks may find it increasingly difficult to obtain funding.

Bank of America Corp., the biggest U.S. lender, lost 3.6 percent and Wells Fargo & Co. declined 3 percent in pre-market New York trading.

Futures on the S&P 500 expiring in December dropped 2.5 percent to 1,126.6 at 7:21 a.m. in New York, reversing an earlier gain. Contracts on the Dow Jones Industrial Average retreated 242 points, or 2.2 percent, to 10,765. The MSCI All- Country World Index of emerging market and developed market stocks slid 2.6 percent, extending its decline from the May 2 high to more than 20 percent. If the gauge closes at its current level it will have entered a so-called bear market.

“Under the surface, we are moving quickly into a secondary credit crisis,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “All underlying measures of credit risk are rising and there are numerous examples of banks having to resort to unusual measures to obtain funding.”

U.S. futures accelerated their declines as a report showed China's manufacturing may contract for a third month in September as measures of export orders and output decline. The preliminary reading of 49.4 for a manufacturing index released by HSBC Holdings Plc and Markit Economics today compares with the final reading of 49.9 for August and 49.3 for July. A reading below 50 indicates a contraction.

‘Operation Twist'

The S&P 500 has tumbled 18 percent from a three-year high at the end of April amid concern the economic recovery is weakening. The index slid 2.9 percent yesterday, the biggest drop since Aug. 18, as the Federal Reserve said it will purchase longer-term debt and sell shorter maturities to sustain an economic recovery, confirming speculation it was planning an “Operation Twist” similar to a 1960s central-bank program.

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said. Chairman Ben S. Bernanke expanded use of unconventional monetary tools for a second straight meeting after job gains stalled and the government lowered its estimate of second-quarter economic growth.

“The Fed's action will support the overall U.S. economy, but that's not enough to dramatically improve its unemployment rate, and it will be difficult to get the recovery back on track again in the near future,” said Warit Kathong, a Tokyo-based fund manager at United Investments Co., which manages about $1.8 billion globally. “Markets are still in a risk-off mode. China's manufacturing figure is also showing it will not help the global economic recovery.”

Bank of America lost 3.6 percent to $6.15. Wells Fargo declined 3 percent to $23.

--With assistance from Adam Haigh in London. Editors: Jason Clenfield, Andrew Rummer

To contact the reporters on this story: Kana Nishizawa in Tokyo at knishizawa5bloomberg.net; Shani Raja in Sydney at sraja4bloomberg.net

To contact the editors responsible for this story: Nick Gentle at ngentle2bloomberg.net; Andrew Rummer at arummerbloomberg.net