Archive for Tuesday, September 6, 2011

World markets savaged by U.S. recession fears

September 6, 2011

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— World stock markets took a beating Monday over fears that the U.S. economy was heading back into a recession just as the European debt crisis was heating up and the eurozone’s economic indicators were slumping.

Any troubles in the world’s largest economy cast a long shadow over the markets, and a report Friday that the U.S. economy failed to add any new jobs in August caused European and Asian stock markets to sink sharply Monday.

But the news from Europe was also discouraging. Wall Street, which was closed Monday due to the Labor Day holiday, braced for losses today after the yields in so-called peripheral eurozone countries — Greece, Italy and Spain — rose sharply against those of Germany, whose bonds are widely considered a safe haven.

Although retail sales in the 17-nation eurozone rose unexpectedly in July, a survey of the services sector Monday showed a slowdown across the continent for the fifth consecutive month. The purchasing managers’ index for the eurozone showed the services sector was still growing — unlike the manufacturing sector — but only barely. That will add pressure on the European Central Bank to keep interest rates on hold when it meets this week.

“There’s so much uncertainty, so much fear, that investors don’t know what to do,” said David Kotok, chairman and chief investment officer at Cumberland Advisors.

Investors were also shaken by signs that the Italian government’s commitment to its austerity program is wavering. Prime Minister Silvio Berlusconi’s government has backtracked on some deficit-cutting measures, prompting EU officials to urge Italy to stick to its promised plan.

The difference in interest rates between the Greek and benchmark German 10-year bonds, known as the spread, spiraled to new records on Monday, topping 17.3 percentage points. Yields on the Greek bonds were above 18 percent.

Mario Draghi, the incoming chief of the European Central Bank, told a conference in Paris that among the common currency’s problems was a lack of coordinated fiscal policies and that the solution was more integration.

He dismissed the idea of eurobonds — debt issued jointly by the eurozone countries. Some have argued this would help weaker countries borrow more easily because they wouldn’t have to pay such high interest rates. But stable countries like Germany would likely see their rates rise.

Instead, Draghi suggested the eurozone should adopt rules that would require more budget discipline.

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