World markets savaged by US recession fears

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World markets savaged by US recession fears

By CARLO PIOVANO - AP Business Writer | AP – 3 hrs ago

LONDON (AP) — World stock markets took a beating Monday over fears that the U.S.

economy was heading back into a recession just as the European debt crisis was

heating up and the eurozone's economic indicators were slumping.

Any troubles in the world's largest economy cast a long shadow over the markets,

and a report Friday that the U.S. economy failed to add any new jobs in August

caused European and Asian stock markets to sink sharply Monday.

But the news from Europe was also discouraging. Wall Street, which was closed

Monday due to the Labor Day holiday, braced for losses Tuesday after the yields

in so-called peripheral eurozone countries — Greece, Italy and Spain — rose

sharply against those of Germany, whose bonds are widely considered a safe

haven.

Although retail sales in the 17-nation eurozone rose unexpectedly in July, a

survey of the services sector Monday showed a slowdown across the continent for

the fifth consecutive month. The purchasing managers' index for the eurozone

showed the services sector was still growing — unlike the manufacturing sector —

but only barely. That will add pressure on the European Central Bank to keep

interest rates on hold when it meets this week.

" There's so much uncertainty, so much fear, that investors don't know what to

do, " said Kotok, chairman and chief investment officer at Cumberland

Advisors. " I don't remember the last time stocks were so cheap and nobody wanted

them. "

Investors were also shaken by signs that the Italian government's commitment to

its austerity program is wavering. Prime Minister Silvio Berlusconi's government

has backtracked on some deficit-cutting measures, prompting EU officials to urge

Italy to stick to its promised plan.

The difference in interest rates between the Greek and benchmark German 10-year

bonds, known as the spread, spiraled to new records on Monday, topping 17.3

percentage points. Yields on the Greek bonds were above 18 percent.

Draghi, the incoming chief of the European Central Bank, told a conference

in Paris that among the common currency's problems was a lack of coordinated

fiscal policies and that the solution was more integration.

He dismissed the idea of eurobonds — debt issued jointly by the eurozone

countries. Some have argued this would help weaker countries borrow more easily

because they wouldn't have to pay such high interest rates. But stable countries

like Germany would likely see their rates rise.

Instead, Draghi suggested the eurozone should adopt rules that would require

more budget discipline.

Renewed jitters over the eurozone debt crisis also contributed to the slump in

financial stocks amid concerns the banks would need to raise new capital.

Deutsche bank closed down 8.9 percent in furt, while Societe Generale in

Paris shed 8.6 percent.

The U.S. unemployment crisis has prompted President Barack Obama to schedule a

major speech Thursday night to propose steps to stimulate hiring. Until then,

however, traders coming back from the U.S. holiday weekend will have little to

hold onto.

The August jobs figure was far below economists' already tepid expectations for

93,000 new U.S. jobs and renewed concerns that the U.S. recovery is not only

slowing but actually unwinding. U.S. hiring figures for June and July were also

revised lower, only adding to the gloom.

Many traders have already pulled out of any risky investments — such as stocks,

particularly financial ones, the euro and emerging market currencies — and pile

into safe havens: U.S. Treasuries, the dollar, the Japanese yen and gold.

With Wall Street closed, investors focused their selling in Asia and Europe,

where the equity losses Monday were some of the heaviest this year.

" We've got some rough riding ahead, " said Jack Ablin, chief investment officer

at Private Bank in Chicago, adding he was " concerned that we could see a

second wave of selling when most traders are back at their desks. "

Dow futures were down 1.8 percent at 11,010 points while the broader S & P 500

futures were 2.0 lower at 1,145.70.

After Asian indexes closed lower, with the Japan's Nikkei 225 shedding 1.9

percent, European shares booked sharp losses. Britain's FTSE 100 closed the day

down 3.6 percent to 5,102.58. Germany's DAX slumped a massive 5.3 percent to

5,246.18, and France's CAC-40 tumbled 4.7 percent to 2,999.54.

The health of the U.S. economy is crucial for the wider world because consumer

spending there accounts for a fifth of global economic activity. The U.S.

imports huge amounts from Japan and China and is closely linked at all levels

with the European market. The U.S. has seen a slump in consumer and business

sentiments.

Traders were hoping for signs that the Federal Reserve might take action at its

September meeting to support the economy — perhaps a third round of bond

purchases, dubbed quantitative easing III or QE3, analysts said.

" Right now the possibility has increased, " said Linus Yip, a strategist at First

Shanghai Securities in Hong Kong. " I think they have to do something. The

markets are expecting QE3. "

Banking stocks were among the hardest hit Monday, partly because the U.S.

government on Friday sued 17 financial firms for selling Fannie Mae and Freddie

Mac billions of dollars worth of mortgage-backed securities that turned toxic

when the housing market collapsed.

Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc.,

JP Chase & Co., and Goldman Sachs Group Inc. Large European banks

including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also

sued.

In Asia, Australia's S & P/ASX 200 followed the broaden trend to close down 2.4

percent and South Korea's Kospi slid 4.4 percent. Hong Kong's Hang Seng slid 3

percent. Benchmarks in Singapore, Taiwan, New Zealand and the Philippines also

were down.

Shanghai's benchmark Composite Index down 2 percent to 2,478.74, its lowest

close in 13 months. The Shenzhen Composite Index lost 2.4 percent.

In currencies, the euro weakened to $1.4100 from $1.4187 in New York late

Friday. The dollar was roughly flat at 76.87 yen. Last month, the dollar fell

under 76 yen, which was a new post-World War II high for the Japanese currency.

Benchmark oil for October delivery was down $2.12 to $84.33 a barrel in

electronic trading on the New York Mercantile Exchange. Crude fell $2.48 to

settle at $86.45 on Friday.

In London, Brent crude for October delivery was down $1.63 at $110.70 on the ICE

Futures exchange.

___

Bomkamp in New York, Pamela Sampson in Bangkok and Fu Ting in Shanghai

contributed to this report.

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