A worsening outlook for the world economy drove global stock markets sharply lower on Tuesday and intensified speculation about an emergency US interest rate cut by the Federal Reserve.
News of an unexpected drop in US retail sales last month and a record quarterly loss at Citigroup (NYSE:C), the investment bank, were among the factors undermining Wall Street.
In Europe, a weak survey of German investor sentiment and unexpected subprime-linked writedowns at Hypo Real Estate weighed on sentiment.
Ian Harnett, managing director of Absolute Strategy Research, said pessimism among investors was increasing.
"There is a clear sense out there that the real economy is now facing a major risk," Mr Harnett said.
"The question is: how responsive will the central banks be? Given the choice between financial stability and price stability, the Federal Reserve has shown it will go for the former.
"Market moves such as today's will begin to see calls for the Fed to make an emergency move on interest rates."
US retail sales fell 0.4 per cent last month against expectations of no change.
Combined with relatively benign producer price inflation figures, the data "add weight to the argument for large rate cuts", said James Knightley at ING.
But he added: "We continue to doubt the case for an inter-meeting move or 75 basis point [cut] on January 30 given [Fed chairman] Bernanke's emphasis on 'insurance' rate cuts in his January 10 speech."
Immediately after the retail sales data were released, the futures market moved to price in a 56 per cent chance of a 75 basis point cut in US rates at the end of the month.
Meanwhile, financial stocks were undermined by Citigroup's revelation of a $9.8bn fourth-quarter loss and plans to slash its dividend payout. The bank also took an $18.1bn writedown on mortgages.
In Germany, Hypo Real Estate saw its shares plunge 35 per cent after it said it would make a writedown of EU390m on EU1.5bn of collateralised debt obligations.
The gloom was compounded by another drop in the ZEW institute's economic expectations index - its seventh decline in the past eight months - to a 15-year low.
"German business confidence is in dire straights," said David Brown, European economist at Bear Stearns.
"Unless the European Central Bank wakes up pretty soon to easing monetary policy, the eurozone economy could be paying the price with much weaker growth this year."
Equity markets across the globe took a severe beating. By midday in New York, the S&P 500 was down 2.2 per cent and heading for its lowest close since last March. The Dow Jones Industrial Average traded 1.8 per cent lower and the Nasdaq Composite lost 2.1 per cent.
In Europe, the FTSE Eurofirst 300 shed 2.6 per cent and the FTSE 100 in London fell 3.1 per cent.
Asian stocks also fell heavily. In Tokyo, the Nikkei 225 Average fell 1 per cent to close below the 14,000 mark for the first time in more than two years.
Hong Kong fell 2.4 per cent, Seoul shed 1.1 per cent to a five-month closing low and Sydney lost ground for a seventh successive session.
Government bonds pushed higher after the US data releases. The yield on the 10-year US Treasury was down 3bp at 3.74 per cent while the 10-year Bund yield fell 3bp to 4.03 per cent.
On the currency markets, the dollar tumbled to a 2½-year low againstthe yen but was little changed against the euro.
The Japanese currency rose across the board, notably against the Australian and New Zealand dollars, as investors scaled back risky carry trades, where the yen is sold to fund purchases of higher-yielding assets.
Sterling pulled off a record low against the euro after the release of UK inflation figures.
In commodities, oil fell back amid concerns that slowing US growth could hit demand. February West Texas Intermediate fell $3.02 a barrel to $91.18. Gold held above $900 an ounce after setting a record high of $914 on Tuesday.
The Baltic Dry Index, a gauge of freight cost for bulk commodities such as iron ore, coal or grain, yesterday dropped a further 4.15 per cent to 7,336, taking its fall over the last three days to 12.45 per cent.
No comments:
Post a Comment