EUROPEAN STOCK markets suffered the sharpest one-day fall in more than two years yesterday as fears intensified that the global economic recovery could derail. US stocks also finished substantially down, with the Dow Jones 3.68 per cent lower at the close.
The relative calm seen on stock markets in recent days came to an abrupt end, with traders citing weaker-than-expected economic figures from the US and the lack of a convincing solution to Europe’s debt crisis as triggers for the renewed selling surge.
In an interview to be televised on Sunday, US president Barack Obama said another recession was unlikely but expressed concern about the slow pace of growth.
“I don’t think we’re in danger of another recession, but we are in danger of not having a recovery that is fast enough to deal with a genuine unemployment crisis for a whole lot of folks out there,” he said in excerpts from a CBS interview.
“And that’s why we need to be doing more.”
In Europe, German shares were hardest hit, falling 5.8 per cent, with traders attributing this to the effect of a short-selling ban on financial shares introduced last week in other parts of Europe.
Short-selling refers to the practice of borrowing and selling stocks in the belief they can be bought more cheaply at a later date when the price drops.
Financial stocks bore the brunt of yesterday’s sell-off, as reports emerged that US regulators are ramping up their reviews of the US units of European banks due to fears of a spillover effect from the euro-zone crisis. The European banking sector fell 6.7 per cent yesterday. Heavyweight fallers included Barclays and Société Générale, down 11.5 and 12.3 per cent respectively.
Dublin’s Iseq index wasn’t immune to the sell-off, tumbling 4.3 per cent. London’s FTSE 100 Index slumped 4.5 per cent, while France’s CAC index shed more than 5 per cent.
A Dublin broker pinpointed Tuesday’s Franco-German crisis meeting as the catalyst for the latest wave of turbulence.
The proposals unveiled by French president Nicolas Sarkozy and German chancellor Angela Merkel, though ostensibly aimed at stabilising the euro zone, were just “noise”, the broker said.
The lack of detail surrounding the proposed financial transaction tax meant it only served to create more uncertainty, he said.
“They were playing to their domestic political agency,” he said. “Until such times as we get a . . . co-ordinated political response from the US and Europe, and we have some sense of a large underwriting facility within Europe to buy assets and fund banks, then I think this is going to be a proper sell-off,” he said.
He warned that the sharp falls in stock market prices could trigger a domino effect, forcing down asset prices and creating a negative feedback loop.
“Selling begets selling, which leads to capitulation,” he said.
Already-fragile investor sentiment was further undermined yesterday by data from the Philadelphia Federal Reserve, which showed manufacturing in the mid-Atlantic region of the US contracted by far more than economists expected in August.
The survey is seen as a key indicator of how manufacturing in the US is likely to perform in the future.
US inflation and jobless claims data were also both higher than expected. Retail sales figures from Britain showed that consumers continued to cut back spending in July.
“The market is beginning to price in a recession,” Michael Hewson, market analyst at CMC Markets, said. “And until we get some clear idea of how policymakers are going to deal with euro-zone sovereign debt problems, it’s not going to get any better.”
A Morgan Stanley research note saying the US and the euro zone are “dangerously close to recession” only served to add to investor jitters.
Meanwhile, benchmark US borrowing costs fell below 2 per cent for the first time in at least 60 years.– (Additional reporting Reuters /Financial Times)
