STOCK MARKETS open today amid fears of a fresh sell-off of shares as investors react to the downgrading of the US credit rating and concerns the global economy is headed for a “double dip” recession.
Ongoing concerns about the euro zone debt crisis and political divisions within Europe over the best way to tackle the rising cost of borrowing for Italy and Spain are also expected to weigh on European markets.
Stock markets in the Middle East, which open on Sundays, slumped yesterday following the downgrading of US debt by credit rating agency Standard Poor’s late on Friday.
The markets in Dubai and Qatar fell by 5 per cent while shares in the Tel Aviv market slumped by 6 per cent, forcing a suspension of trading. Israel’s exposure to US debt and fears a global slowdown would hurt oil prices led to the sell-off, according to analysts.
Last week, global stock markets shed $2.5 trillion in value, the biggest weekly decline seen since October 2008. Analysts said the sell-off was sparked by concerns over a slowdown in the US economy and by the lack of effective political leadership in Europe and the US in taking action to cut government debt.
“Market sentiment appears acutely vulnerable, given the build-up of concern on a sharper US slowdown and speculation on the appropriate policy response, and lingering fears stemming from the sovereign debt crisis in Europe,” Citigroup analysts said in a research note, which warns of continued volatility ahead.
Goldman Sachs is forecasting a one-in-three chance of a new US recession due to the worsening European debt crisis, the possible failure to extend payroll taxes and high unemployment.
Finance ministers from the Group of Seven (G7) most developed countries were due to hold a conference call late last night to discuss the cut in the US sovereign debt rating and the ongoing euro zone debt crisis.
French president Nicolas Sarkozy, who chairs the G7 and G20 forums this year, discussed the crisis on Saturday with Britain’s prime minister David Cameron. “Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days,” said a British government spokesman.
Stock market analysts believe the downgrade in US debt will increase investors’ risk aversion leading to a strengthening of safe haven currencies such as the Japanese yen and the Swiss franc. Japan and Switzerland took steps last week to try to stop a steep appreciation in the value of their currencies.
China, which holds at least $1.1 trillion of US debt, sharply criticised the US in a commentary released by its official news agency Xinhua.
“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” said the commentary, which was published in Chinese newspapers.
European newspapers yesterday expressed alarm at the euro zone debt crisis, which last week saw the interest rate on Italian and Spanish bonds reach 6 per cent – a level analysts believe is unsustainable in the long term. “The world on the edge of collapse,” said a headline in France’s Journal de Dimanche. A sub headline stated: “The week starting should be crucial. Markets from now on are living in fear of a crash.”
On Friday the ECB bought Irish and Portuguese bonds but did not buy Italian bonds, arguing that it needed to implement reform plans before it would intervene.
In an apparent attempt to persuade the ECB to begin buying Italian bonds, prime minister Silvio Berlusconi announced late on Friday plans to fast track a reform plan.
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