Mounting evidence that the world economy is slowing sharply sent global stock markets spiralling down today.
Investors brushed off the US Federal Reserve’s efforts to spur growth and focused instead on the central bank’s gloomy outlook.
Oil and other commodities tumbled, too, in the face of several signs that economies are shifting into reverse: the Fed’s assessment of the US economy is gloomier than a month ago, while figures from Europe hinted that a recession is looming and a Chinese manufacturing survey suggested a sharp slowdown.
These concerns heap more misery on markets already worried about Europe’s debt crisis. Hong Kong’s Hang Seng led the retreat, diving around 5 %.
The losses began on Wednesday afternoon in the US after the Fed announced a highly anticipated programme to trade in $400bn (€297bn) worth of short-term bonds for the same amount of longer-term bonds. The goal is to ensure low borrowing rates for a long period, thereby helping to stimulate the housing market and other economic activity.
The programme – known as Operation Twist – was bigger than expected, but that seemed to work against the Fed: Investors took it as a signal that the central bank was growing more concerned about the economy.
In its statement, the Fed noted “significant downside risks to the economic outlook, including strains in global financial markets.”
“Confidence was already shaky, at best, and the Fed’s words only heightened worries about the outlook,” said Benjamin Reitzes, an analyst at BMO Capital Markets.
In late-afternoon trading in Europe, France’s CAC-40 was down a hefty 4.4 % at 5,186 while Germany’s DAX slid 4.6 % to 5,186. The FTSE index of Britain’s leading shares was down 4.5 % at 5,051.
Wall Street also opened substantially lower. The Dow Jones industrial average was down 2.8 % lower at 10,816 while the broader Standard & Poor’s 500 index fell 2.7 % to 1,136.
The euro was also under severe pressure, trading 0.9 % lower at 1.3457 dollars as the dollar garnered support through its widely-perceived status as a a safe haven in times of financial turbulence.
Europe’s single currency, which is used by 17 countries, is also being dragged down by concerns over Greece, which is currently in talks with its creditors about whether it has done enough to get the next slice of its bailout. If Athens doesn’t get the €8bn by mid-October, it will run out of money.
A Greek default would be disastrous for an already suffering eurozone.
Concerns about Greece have hit European banks, especially those in France, hard in recent weeks since the institutions hold a substantial amount of Greek debt.
Today the CEO of BNP Paribas was the latest to try to calm markets by declaring that his bank had a sufficient cushion of cash on hand. There had been reports that the bank was shopping around for investors in the Middle East.
“I formally deny it. We have no specific contact because we have no need for a capital increase,” Baudouin Prot told BFM Business television. “With BNP Paribas, there is no particular problem. It’s at the eurozone level that the concern rests and it’s at that level that it needs to be solved.”
The day also brought more bad news about the state of the eurozone economy there, with a closely watched survey from financial information company Markit indicating a recession could be on the way.
Markit’s monthly purchasing managers index – a gauge of business activity - fell to 49.2 in September, its lowest level since July 2009, from 50.7 the previous month.
“The fall in the eurozone composite PMI below the theoretical 50 ’no-change’ barrier provides the strongest sign yet that the region is on the cusp of a recession,” said Ben May of Capital Economics.
Eurostat, the EU’s statistics office, also revealed that eurozone industrial orders plunged 2.1 % in July alone, while the European Commission revealed that its main measure of consumer confidence slid to a two-year low of minus 18.9 in September from -16.5 in August 2011.
A recession will only make it harder for Europe’s heavily indebted countries to pay down their debts since it effectively means their governments are taking in less income.
Fears of a recession have driven down oil prices, which typically rise when economies are humming and their energy demands are increasing.
Benchmark oil fell a whopping 4.58 dollars in electronic trading on the New York Mercantile Exchange to 81.30 dollars. Brent crude was down 4.19 dollars to 106.16 dollars. Several metals were dragged down multiple percentage points as well, including silver, which tanked nearly 10 %.
Earlier in Asia, stocks also fell. Japan’s Nikkei 225 dropped 2.1 % to close at 8,560.26. South Korea’s Kospi slid 2.9 % to 1,800.55. Australia’s S&P/ASX 200 was 2.6 % down at 3,964.90.
Hong Kong’s Hang Seng saw the biggest fall, diving over 900 points, or 4.9 %, to close at 17,911.90.
In mainland China, the Shanghai Composite Index closed down 2.8 % at 2,443.06.