Stocks Plunge Worldwide on Fears of a U.S. Recession
- by/par 2 SOLITUDES
- Published / Édité 01/21/2008
FRANKFURT — Fears that the United States is in a recession reverberated around the world on Monday, sending stock markets from Frankfurt to Bombay into a tailspin and puncturing the hopes of many investors that Europe and Asia will be able to sidestep an American downturn.
On a day when United States markets were closed in observance of Martin Luther King’s Birthday, the world’s eyes were trained nervously on the United States. Investors reacted with what many analysts described as panic to the multiplying signs of weakness in the American economy.
Shares of banks led the decline in many countries, underscoring that the subprime crisis continues to hobble the global financial system. On Monday, a big German state bank, WestLB, said it would report a loss of $1.4 billion in 2007 because of its exposure to deteriorating mortgage assets.
“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”
The sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay. The Frankfurt Stock Exchange’s Dax index plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index was the second-worst single-day tumble in its history.
Stocks followed suit when markets opened in the Western Hemisphere. Canadian stocks were down 4 percent in early afternoon, and a key market index in Brazil was off almost 6 percent.
And trading Monday in stock index futures, while light and not always a reliable indicator, pointed to a substantial decline when markets reopen on Wall Street. Futures in the Dow Jones industrial average were down 520 points, or more than 4 percent.
Investors were scarcely comforted by President Bush’s announcement on Friday of an economic stimulus package of as much as $145 billion. Mr. Bush’s “shot in the arm,” economists said, did not persuade the rest of the world that the United States will escape a recession, or that it will either.
The turmoil will put even more pressure on the European Central Bank, which has charted a different course from the Federal Reserve by warning that it might raise interest rates to curb inflation, rather than cut them, as the Fed has, to ward off a recession. Mr. Mayer and others predict the bank will be forced into an about-face in coming months.
While Asia has been less buffeted by the credit crisis than Europe, the Bank of China now appears vulnerable, with analysts predicting it will have to write down the value of its American mortgage holdings.
Investors in Asia have been in a state of denial about a possible recession in the United States, said Adrian Mowat, JPMorgan’s chief strategist in Asia. But now, he said, “there’s no debate about it.” The only question, he added is “how long and deep” a recession might be.
In Japan, which may be facing a new recession of its own, most indexes were off by more than 3 percent.
The angst about the United States belies the popular theory that Europe and Asia are not as dependent on the American economy as they once were, in part because they trade more with each other. The theory, known as decoupling, has been used to explain why economies like China and Germany have kept growing robustly, even as the United States has slowed.
“The market is not at all convinced about decoupling, and I think the market is probably right,” Mr. Mayer said. “When you look at it more closely, we’re suffering from the same issues.”
The housing market, after a long boom, is cooling off in several countries, notably Britain, Spain and Ireland. That will depress the growth rate in those countries, which are among Europe’s economic pace-setters.
European banks continue to make unwelcome disclosures about write-downs of mortgage assets, even if the losses are not as dire as those reported by Citigroup or Merrill Lynch. Banks loans across Europe are being constrained, according to a recent survey by the European Central Bank.
German banks, in particular, are still haunted by the American subprime mess. WestLB’s troubles came a week after a German property lender, Hypo Real Estate, lost one-third of its market value after it disclosed higher-than-expected losses from the credit crisis.
WestLB, after warning that its 2007 losses would be more than twice its earlier estimate, said its key shareholders, the state of North Rhine-Westphalia and regional savings bank, had agreed to inject to inject 2 billion euros ($2.9 billion) of fresh capital into the bank to stabilize it.
Also on Monday, Commerzbank warned it would make additional write-downs in the fourth quarter of 2007. This caught analysts off guard, since Commerzbank has been fairly upbeat about its exposure.
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