Stocks plummeted across the world on Monday amid fears of a global recession, with markets in Europe suffering their biggest one-day losses since the September 11 attacks on the United States.
Dealers said a major new plan by President George Bush to prevent a United States recession was not enough to offset the stream of bad news from banks due to the crisis in the American housing market.
“People aren’t buying the US bail-out story and that feeling has been exacerbated by the weakness overnight in the Asian markets,” said Richard Hunter, equities analyst at broker Hargreaves Lansdown in London.
“The other thing we have seen today [Monday] is a lack of buying interest — people are battening down the hatches while they see what happens in the US,” he said, noting that Wall Street was closed on Monday for a national holiday.
A credit squeeze prompted by a crisis in the US subprime, or high-risk, mortgage sector has given way to a wider malaise in the world’s biggest economy, with unemployment rising and the dollar falling.
Many analysts now fear that the US slowdown could damage the world economy.
International Monetary Fund head Dominique Strauss-Kahn warned on Monday that “all the world’s countries are suffering from the slowdown in growth in the United States, at least all developed countries”.
And later on Monday, Jean-Claude Juncker, the chairperson of the Eurogroup finance ministers, added to the gloom.
“The situation is continuing to deteriorate in the United States,” Juncker said after chairing a meeting in Brussels with finance ministers from the 15 countries that share the euro.
“In recent months, we have always ruled out a recession in the United States, but we cannot totally rule it out today [Monday],” added Juncker, who is both Luxembourg’s Prime Minister and Finance Minister.
World oil prices slid on deepening worries about a potential drop in energy demand owing to the weakness of the US economy, analysts said. New York’s main contract, light sweet crude, shed $1,76 to $88,81 per barrel.
The dollar, meanwhile, rose strongly against the euro. Dealers said that “carry-trade” investors, who had been putting money into higher-yielding currencies, were now cutting back on those positions to the benefit of the dollar, which still offers safe-haven qualities.
But there were no safe havens Monday for stock market investors.
The main London, Paris, Frankfurt and Madrid exchanges had their biggest single day losses since the September 11 2001 attacks on New York and Washington.
London’s FTSE 100 index plunged 5,48%, the Paris CAC 40 lost 6,83%, Frankfurt’s DAX shed 7,16 % and Madrid fell 7,54 %. Other exchanges across the continent saw similar losses.
Hours later, the chill had spread to Latin America. In São Paulo, Latin’s biggest market, the main Ibovespa index fell 6,6% to 53 709 points at close of trading on Monday.
Argentina’s Buenos Aires stock exchange closed 6,27% down at 1 876,87.
The nervousness in Europe and America was fuelled by falls earlier in the day across Asia, with Tokyo’s benchmark index closing a hefty 3,86% lower, hitting its lowest point since October 2005.
Markets were reacting to the US president’s plan announced last Friday for $140-billion in temporary tax cuts and other measures to ward off a recession in the world’s biggest economy.
Bush’s package “is seen as too late and not strong enough to make an impact”, said Najeeb Jarhom, head of research for retail clients at Fraser Securities in Singapore.
“It looks like the US is heading for a recession or may be already in recession, looking at the data,” he said.
A recession is negative growth for two consecutive quarters.
Asian markets had rebounded at the end of last week on hopes for Bush’s stimulus plan but opened sharply down on Monday after seeing Wall Street’s lack of enthusiasm for the announcement.
Investors were also uneasy as it would take another day to gauge further reaction in the United States, where markets were closed Monday for the Martin Luther King holiday.
Bush on Friday said his plan would be worth “around 1%” of US gross domestic product and offer tax rebates, incentives for businesses and other measures to encourage growth.
Dealers said they had hoped for surprises in Bush’s much-anticipated announcement, particularly on how to salvage the troubled housing market.
The US economy has been hit hard by rising defaults in the “subprime” mortgage sector, in which Americans with bad credit records are struggling to pay back housing loans given to them during the housing boom. — AFP