August 8, 2011
Tumult in Global Markets Continues
By DAVID JOLLY and BETTINA WASSENER
PARIS — An extraordinarily tumultuous trading day in Asia extended into Europe on Tuesday, while gold prices hit new highs and the dollar fell, dashing hopes that the global stock market sell-off that has flattened investors over the last two weeks would lose steam.
European stocks rallied at the opening but quickly fizzled. Just before mid-day, the Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 4 percent, while the FTSE 100 index in London slid 3.6 percent. The declines in Europe were led by energy companies like Royal Dutch Shell and industrial giants like Siemens, businesses that stand to suffer in an economic downturn.
Trading in U.S. index futures suggested Wall Street stocks would fall modestly at the opening bell, a day after the U.S. market’s worst showing since December 2008. The Dow Jones industrial average fell 5.6 percent Monday, and the Standard & Poor’s 500-stock index dropped 6.7 percent.
The fear among investors has reached epidemic proportions, with the sell-off erasing $8.1 trillion — or 14.8 percent of market capitalization — from global stock markets since July 24.
Asian trading saw enormous volatility, with steep early declines partially reversed as the day progressed. But the Kospi index in Seoul closed 3.6 percent lower and the Tokyo benchmark Nikkei 225 stock average fell 1.7 percent. In Hong Kong, the Hang Seng index fell 5.7 percent and in Shanghai the composite index closed essentially flat.
“When you get declines of this sort, it is technical factors and emotion that drive markets — the fundamentals are largely irrelevant,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore, referring to Wall Street’s plunge on Monday.
He characterized sentiment in Asia as “weary resignation” rather than outright panic, but he said that the markets in general had been caught in a “negative feedback loop” — where declining markets fuel worries about the economic fallout of the turmoil, which in turn undermines sentiment further.
Alone among the big markets, the Sydney benchmark S&P/ASX 200 index closed Tuesday in positive territory, with a 1.2 percent gain.
U.S. crude oil futures for September delivery fell 2.1 percent to $79.59 a barrel.
The dollar declined against other major currencies. The euro rose to $1.4226 from $1.4179 late Monday in New York, while the British pound rose to $1.6346 from $1.6318. The dollar fell to 77.04 yen from 77.76 yen and to 0.7418 Swiss francs from 0.7550 francs.
Investors continued to seek safe-haven assets. Comex gold futures rose 3.2 percent to $1,768 an ounce, having set a record above $1,770. But the yields on benchmark U.S. Treasury notes and German bonds rose slightly, indicating the rush on Monday into those assets, considered among the safest, had eased.
The European Central Bank continued its purchases of government debt, news agencies reported. That helped to send Spanish and Italian 10-year bond yields lower for a second day, with Spain below 5 percent for the first time this year, and Italy at 5.05 percent.
Investors were looking ahead to a meeting later Tuesday of the United States Federal Reserve’s policy board, with the market looking for any guidance or signals about the possibility of the Fed injecting any further monetary stimulus to help stem the confidence crisis.
Holger Schmieding, chief economist at Berenberg Bank in London, predicted that bank officials would discuss a possible third-round of government bond purchases, so-called quantitative easing, but would wait before actually implementing such a policy.
“The trouble is that the Fed doesn’t have a lot of tools left in its toolkit,” said Robert Reilly, Asia Co-head of Flow Fixed Income and Currencies at Société Générale in Hong Kong. “They need to calm the markets, and reassure them that they will provide liquidity.”
Adding to the risks faced by investors is the potential for the upheaval to weaken the wider economy by constraining the ability and willingness of banks to extend credit to businesses and making it harder for companies to raise money from the capital markets.
The decision Friday by Standard & Poor’s to downgrade the United States’ credit rating — once deemed bulletproof — deepened the uncertainty but was not in itself the only cause of the current sell-off, many analysts and market strategists said.
Rather, the downgrade, combined with the widening of the debt worries in Europe, highlighted the fact that governments in many parts of the developed world are having to rein in spending at a time when private-sector spending is still anemic.
“The fear is that when you remove that prop, the chances of recession go up,” Mr. Davies said. “Chances of a double-dip recession have increased markedly in the last few weeks.”
Analysts at Royal Bank of Scotland echoed that assessment, noting in a research report that although they did not believe that a renewed recession was the most likely outcome, the odds of a double dip in the United States had increased “given the risk of negative psychology feeding on itself, and with the economy already looking more fragile.”
Officials in Asia tried to soothe markets on Tuesday by stressing that they were closely monitoring the situation.
Masaaki Shirakawa, the Bank of Japan governor, warned of the dangers of a rising yen for Japan’s export-led economy.
A strong yen makes Japan’s exports more expensive overseas and dilutes profits when they are repatriated into the home currency.
“As Japan’s economy starts to recover from the disaster, we must be especially wary of any factors that might have an adverse effect on our exporters or their earnings,” Mr. Shirakawa said in Parliament.
Bettina Wassener reported from Hong Kong. Graham Bowley contributed reporting from New York and Hiroko Tabuchi from Tokyo.
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