Stocks drop sharply as European debt fears return

By Pan Pylas

Associated Press

Published: Monday, Oct. 31 2011 11:15 a.m. MDT

LONDON — Global stocks fell sharply Monday on concerns about Italy's ability to tame its colossal debts and the news that a U.S. brokerage firm filed for bankruptcy over its potential exposure to bad European government debt.

The New York Federal Reserve suspended MF Global Holdings from conducting new business as a Treasury bond dealer Monday and hours later the firm sought bankruptcy protection after reportedly investing $6 billion in sovereign bonds issued by European countries.

Trading in MF Global stock was halted while bank stocks took s pummeling, with Citigroup Inc. down 4.9 percent by midday in New York.

"The news that MF Global is in a perilous financial position has contributed to weakness in equity markets today," said Louise Cooper, markets analyst at BGC Partners. "It is being billed as the first American failure thanks to the eurozone crisis."

U.S. stock markets followed their counterparts in Europe and Asia in sinking. The Dow Jones industrial average was down 1.3 percent at 12,067.71 while the broader Standard & Poor's 500 index fell 1.4 percent to 1,267.56.

In Europe, the FTSE 100 index of leading British shares closed down 2.8 percent at 5,544.22 while Germany's DAX fell 3.2 percent to 6,141.34. The CAC-40 in France ended 3.2 percent lower at 3,242.84 while the Milan exchange closed down 3.8 percent. The shine came off the euro too after its big advance to over $1.40 last week. It was trading 1.5 percent lower at $1.3930.

Last week, stocks had enjoyed one of their best weeks in months as investors breathed a sigh of relief that eurozone leaders finally presented the outline of a convincing anti-crisis strategy. The three-pronged strategy of boosting the bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing the banks to raise more capital was largely viewed favorably by the markets, although details need to be ironed out.

Many analysts, however, think Europe will end up having to do more, especially if bond market investors continue to ask for more in return for buying up Italian debt — a poorly received Italian auction Friday has fueled new concerns.

Italy is the eurozone's third largest economy and only Greece has more debt as a percentage of national income. Italy's debts dwarf the €1 trillion ($1.4 trillion) that Europe's bailout fund will have at its disposal if last week's commitments are delivered.

"Following last week's euphoria over the plan, investors are in a more skeptical mood this week," said Sal Guatieri, an analyst at BMO Capital Markets. "In our view, while the plan will help contain the risk of a European banking crisis and financial contagion to other countries, it falls well short of resolving the crisis."

Earlier in Asia, the main point of interest in financial markets was the Bank of Japan's latest intervention to weaken the yen, which had hit a new post World War II high against the dollar.

The strong yen has dented earnings of Japanese corporations such as Nintendo Co. and Toyota Motor Corp. and hurt the economy's recovery from the March 11 earthquake and tsunami. Finance Minister Jun Azumi said monetary authorities could continue intervening.

The dollar surged about 5 percent to above 79 yen for a while, before slipping back to 78 yen. Japan's export sector — whose fortunes are largely tied to the relative strength of the yen — rose abruptly. Isuzu Motors Corp. jumped 3.7 percent. Canon Inc. rose 1 percent and Nikon Corp. added 1.8 percent. Nintendo Co. gained 1.5 percent.

Those gains helped limit the losses on Tokyo's Nikkei 225 index. It closed 0.7 percent lower at 8,988.39.

Analysts are skeptical over whether the intervention will have a long-lasting impact. Previous efforts this year have provided only short-term relief.

The intervention is likely to feature at a summit of leaders from the Group of 20 industrial and developing nations in Cannes, France, later this week. How to get the global economy moving again is likely to the main topic of debate.

There's also a lot of U.S. economic data this week, culminating in Friday's monthly jobs report.

"The coming week is loaded with key data/event risks," said Elsa Lignos, an analyst at BMO Capital Markets.

The Federal Reserve and the European Central Bank also meet to decide on their monetary policies this week. The new ECB chief, Mario Draghi, will hold his first meeting and press conference Thursday. Investors will be looking for signs that the ECB is considering cutting interest rates and that it will continue its program of buying the bonds of troubled eurozone nations, especially Italy and Spain.

Elsewhere in Asia, mainland Chinese shares were mixed. The benchmark Shanghai Composite Index snapped a five-session winning streak by falling 0.2 percent to 2,468.25, while the Shenzhen Composite Index added 0.5 percent to 1,040.93.

Hong Kong's Hang Seng slipped 0.7 percent to 19,864.87 and South Korea's Kospi fell 1.1 percent to 1,909.03.

Oil prices tracked equities lower, with the benchmark rate for December delivery down $1.48 at $91.84 a barrel in electronic trading on the New York Mercantile Exchange.

Pamela Sampson in Bangkok contributed to this report.

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