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Stocks nosedive amid fears of new global recession

By Sarah Dilorenzo

Associated Press

Published: Thursday, Sept. 22 2011 8:35 a.m. MDT

A group of pensioners on a guided tour, sit in front of the main screen at the Stock Exchange in Madrid Thursday Sept. 22, 2011. World stocks skidded lower Thursday, stung by the Federal Reserve's pessimistic assessment of the U.S. economy and the perceived ineffectiveness of measures to kickstart growth. On top of that: a sovereign-debt crisis in Europe that is threatening to bankrupt Greece, cause Italy to default on debts and infect the continent's banking system.

Paul White, Associated Press

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PARIS — Mounting evidence that the world economy is slowing down sharply sent global stock markets spiraling down Thursday as investors brushed off the U.S. Federal Reserve's efforts to spur growth and focused instead on the central bank's gloomy outlook.

Oil and other commodities tumbled, too, in the face of several signs that economies are shifting into reverse: the Fed's assessment of the U.S. economy is gloomier than a month ago, while figures from Europe hinted that a recession is looming and a Chinese manufacturing survey suggested a sharp slowdown.

These concerns heap more misery on markets already skittish about Europe's debt crisis. Hong Kong's Hang Seng led the retreat, diving around 5 percent.

The losses began Wednesday afternoon in the U.S. after the Fed announced a highly anticipated program to trade in $400 billion worth of short-term bonds for the same amount of longer-term bonds. The goal is to ensure low borrowing rates for a long period, thereby helping to stimulate the housing market and other economic activity.

The program — known as Operation Twist — was bigger than expected, but that seemed to work against the Fed: Investors took it as a signal that the central bank was growing more concerned about the economy. In its statement, the Fed noted "significant downside risks to the economic outlook, including strains in global financial markets."

"Confidence was already shaky, at best, and the Fed's words only heightened worries about the outlook," said Benjamin Reitzes, an analyst at BMO Capital Markets.

In late-afternoon trading in Europe, France's CAC-40 was down a hefty 4.4 percent at 5,186 while Germany's DAX slid 4.6 percent to 5,186. The FTSE index of Britain's leading shares was down 4.5 percent at 5,051.

Wall Street also opened substantially lower. The Dow Jones industrial average was down 2.8 percent lower at 10,816 while the broader Standard & Poor's 500 index fell 2.7 percent to 1,136.

The euro was also under severe pressure, trading 0.9 percent lower at $1.3457 as the dollar garnered support through its widely-percieved status as a a safe haven in times of financial turbulence.

Europe's single currency, which is used by 17 countries, is also being dragged down by concerns over Greece, which is currently in talks with its creditors about whether it has done enough to get the next slice of its bailout. If Athens doesn't get the €8 billion ($11 billion) by mid-October, it will run out of money.

A Greek default would be disastrous for an already suffering eurozone.

Concerns about Greece have hit European banks, especially those in France, hard in recent weeks since the institutions hold a substantial amount of Greek debt.

On Thursday, the CEO of BNP Paribas was the latest to try to calm markets by declaring that his bank had a sufficient cushion of cash on hand. There had been reports that the bank was shopping around for investors in the Middle East.

"I formally deny it. We have no specific contact because we have no need for a capital increase," Baudouin Prot told BFM Business television. "With BNP Paribas, there is no particular problem. It's at the eurozone level that the concern rests and it's at that level that it needs to be solved."

The day also brought more bad news about the state of the eurozone economy there, with a closely watched survey from financial information company Markit indicating a recession could be on the way.

Markit's monthly purchasing managers index — a gauge of business activity — fell to 49.2 in September, its lowest level since July 2009, from 50.7 the previous month.

"The fall in the eurozone composite PMI below the theoretical 50 'no-change' barrier provides the strongest sign yet that the region is on the cusp of a recession," said Ben May of Capital Economics.

Eurostat, the EU's statistics office, also revealed that eurozone industrial orders plunged 2.1 percent in July alone, while the European Commission revealed that its main measure of consumer confidence slid to a two-year low of minus 18.9 in September from -16.5 in August 2011.

A recession will only make it harder for Europe's heavily indebted countries to pay down their debts since it effectively means their governments are taking in less income.

Fears of a recession have driven down oil prices, which typically rise when economies are humming and their energy demands are increasing.

Benchmark oil fell a whopping $4.58 in electronic trading on the New York Mercantile Exchange to $81.30. Brent crude was down $4.19 to $106.16. Several metals were dragged down multiple percentage points as well, including silver, which tanked nearly 10 percent.

Earlier in Asia, stocks also fell. Japan's Nikkei 225 dropped 2.1 percent to close at 8,560.26. South Korea's Kospi slid 2.9 percent to 1,800.55. Australia's S&P/ASX 200 was 2.6 percent down at 3,964.90.

Hong Kong's Hang Seng saw the biggest fall, diving over 900 points, or 4.9 percent, to close at 17,911.90.

In mainland China, the Shanghai Composite Index closed down 2.8 percent at 2,443.06.

AP Business Writer Pamela Sampson contributed to this report from Bangkok.

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