Dubai: The global slump in markets, that has by some estimates erased more than $4.5 trillion from the value of equities worldwide since July 26, continued on Friday as US stocks extended their worst weekly slide since November 2008.
The S&P index is down about 6 per cent for the year. Equities from New York to Shanghai and London have tumbled this week amid growing concern the US, the world’s biggest economy, may slip into recession.
The sell-off of stocks was sparked by concerns that the US may lose its top credit rating and Europe’s debt crisis will spread. Markets in Asia were particularly badly hit.
Despite a stronger-than-forecast jobs report and strong company results, markets remain worried that the US has not done enough to sort out its debt problems, which could lead to a credit rating downgrade that would harm its economy. “Risk is going crazy, blowing up completely,” said Daniel Hawkins, director and founder of Mariana Capital Markets Ltd., a London-based brokerage firm specialising in equity derivatives. “People are very scared of what’s going on. Everyone is trying to buy protection in the options market. It feels like 2008.”
Not defensive
Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in the US, sounded a calmer note: “The jobs report was surprisingly good, the economy is still growing, but that doesn’t mean that you won’t have challenges to overcome. The fear of a downgrade will be with us for a while. It’s time to become more cautious, not defensive.”
Meanwhile, on the other side of the Atlantic, Italy’s borrowing costs rose above Spain’s yesterday for the first time in more than a year, ratcheting up fears that Italy will need a bailout that the rest of the continent won’t be able to afford.
Efforts by the European Central Bank to reassure investors that it would support banks failed, especially after the head of the European Commission Jose Manuel Barroso warned that: “It is clear that we are no longer managing a crisis just in the Euro-area periphery”. European leaders interrupted their holidays to find a way to keep the turmoil from pushing Spain and Italy to a financial collapse that would further hobble an already-waning global recovery. Government and financial authorities in the US and Europe will be meeting this week.
But, there is little reason for optimism. “Volatility begets volatility,” said Jim Strugger, a derivatives strategist at MKM Partners LP in the US. “Based on precedent, the next couple weeks we should have at least another 2 per cent day up or down, and six or seven 1 per cent days in either direction. The volatility should stay with us.”
Positive US jobs data fails to lift markets
Even a solid jobs report wasn’t good enough to calm financial markets. The Dow Jones industrial average turned lower on Friday as traders focused on Europe’s latest efforts to contain the region’s debt crisis. The Dow had jumped as many as 171 points shortly after the opening bell on a report that US hiring picked up last month. By mid-morning it was down more than 100 points.
European leaders are calling emergency meetings and seeking to reassure markets that a large nation such as Italy or Spain won’t become the latest country in the region to need a financial backstop.
The US economy added 117,000 new jobs in July, and hiring in May and June were not as bad as reported previously, the Labour Department reported. The unemployment rate inched down to 9.1 per cent from 9.2 per cent, partly because some unemployed workers stopped looking for work. Health care providers and manufacturers added jobs.
Recession fears
About twice as many jobs as that must be created every month in order to rapidly reduce the unemployment rate. That rate has topped 9 per cent in every month except two since the recession officially ended in June 2009. Many economists still fear that the economy might dip back into recession.
The solid report failed to lift the spirits of traders a day after the Dow Jones industrial average plunged 513 points. It was the worst day for the Dow since 2008.
In late morning trading the Dow Jones industrial average fell 117 points, or 1 per cent, to 11,266. The Standard & Poor’s 500 index fell 15, or 1.3 per cent, to 1,184. The Nasdaq composite index fell 43, or 1.7 per cent, to 2,512.
Italy’s borrowing costs shot higher, escalating fears that Europe’s third-biggest economy might need a bailout.
Overseas markets also fell. Tokyo, Hong Kong and China all closed down 4 per cent. Taiwan lost 6 per cent. In Europe, shares recovered some of their losses after plunging to their lowest levels in more than a year. Germany’s DAX index fell 1.4 per cent. Other indexes showed smaller losses.
Thursday’s sell-off was the Dow’s ninth-worst day on record in terms of points lost. It wiped out the Dow’s remaining gains for 2011. US markets have entered a correction, falling 10 percentage points from their highs this spring.
Sputtering growth
Traders have focused on a torrent of bad economic news since the US government struck a deal last weekend to raise the nation’s borrowing limit, averting a debt default. Manufacturing and the service sector are barely growing. The economy expanded in the first half of the year at its slowest pace since the recession ended in June 2009. Economists at Bank of America Merrill Lynch estimate there is a 35 per cent chance of another recession within the next year.
Only three of the three S&P 500’s ten industry groups are up for the year: Health care, utilities and consumer staples. Traders consider those companies to be relatively recession-proof.
The market’s decline continues two weeks of almost uninterrupted selling on Wall Street. The Vix, one measure of investor fear, has doubled since July 1. Economic fears pushed benchmark West Texas Intermediate crude for September delivery down by 64 cents yesterday to $85.98 per barrel on the New York Mercantile Exchange.
The yield on the 2-year Treasury note fell to 0.29 per cent, after brushing a record low of 0.26 per cent earlier on Friday.
