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Global stock meltdown: Is another recession on its way?

By GABRIELE STEINHAUSER
August 5, 2011

Pedestrians are reflected on the glass of stock indicators in downtown Tokyo on Friday Aug. 5, 2011. Asian stock markets are tumbling amid fears the U.S. may be heading back into recession and Europe's debt crisis is worsening. (AP Photo/Kyodo News)

Stocks around the world tumbled Friday ahead of crucial U.S. jobs figures, continuing a losing streak reminiscent of the aftermath of the collapse of U.S. investment bank Lehman Brothers in 2008.

Growing panic about the debts of big eurozone countries like Italy and Spain, paired with fears the U.S. may be heading back into recession. Jobs figures later could well go a long way to determining whether the U.S. economy is indeed on the point of shrinking again.

The biggest one-day points decline on Wall Street since the 2008 financial crisis Thursday carried into Asian and European markets Friday, taking down oil prices as well, as investors were preparing for a slowdown in demand.

In Europe, major markets were firmly in the red once again, although stocks were regaining some ground from earlier in the day. London’s FTSE 100 declined 2.5 percent to 5,260 and Germany’s DAX shed 2.1 percent to 6,282. France’s CAC-40 lost 0.7 percent to 3,297.

Only Spain’s Ibex and Italy’s FTSE MIB were in positive territory, with Spanish stocks gaining 0.4 percent while Italian shares were up 0.2 percent, even though figures showed both economies barely grew in the second quarter of the year.

Wall Street was set for a lower open with Dow futures down 0.5 percent at 11,317 while S&P 500 futures fell 0.4 percent to 1,193.

Falling stocks are a sign of diminishing confidence in the global economy and that’s being felt in oil prices too. The main New York contract was down a further 79 cents a barrel at $85.84 a barrel, having earlier dipped below $85.

Investors around the world are waiting anxiously for U.S. employment figures this afternoon, which could give a firm indication on whether the world’s largest economy is indeed headed for a double-dip recession. Analysts expect payrolls to increase by 85,000 and the jobless rate to remain at 9.2%.

“If we get a strong jobs report, this could be enough to send stock markets higher — the relief rally we are looking for — but given the depth of the economic crisis facing the developed world, I am not sure how long such a relief rally will last,” said Louise Cooper, markets analyst at BGC Partners. “A poor number could see further declines.”

The protracted debate about raising the debt ceiling in the U.S. and confusion about Europe’s strategy to fight its worsening debt crisis have undermined confidence in policy makers’ willingness and ability to finally draw a line under the financial troubles that have plagued the Western world for four years.

Disagreements in the U.S. Congress are set to herald more struggles about budget cuts at a time when many economists are calling for economic stimulus, while investors fear that Europe may be overwhelmed by growing troubles in Italy and Spain, the eurozone’s third and fourth largest economies.

Eurozone leaders’ reluctance to increase the size of their bailout fund and quickly implement changes to its powers, such as giving it the ability to buy up government bonds, have left the currency union without a clear defense against market troubles over the summer.

The European Central Bank on Thursday bought up Irish and Portuguese government bonds, but is reluctant to do the same for Italy and Spain until the two countries have taken additional budgetary measures, the head of Belgian’s central bank Luc Coene told Belgian radio station RTBF.

Coene, who sits on the ECB’s decision-making board, warned that without stricter rules on debts and deficits the euro was not viable in the long-term.

The single currency regained some of its recent losses Friday, trading up 0.6 percent at $1.4250.

The yield, or interest rate, on Italian 10-year bonds surpassed their Spanish equivalents for the first time since May 2010, indicating that investors are now more worried about Rome’s massive debts, the second highest in the eurozone, and its difficult political landscape. Italian 10-year yields were at 6.13 percent, while Spain’s traded at 6.11 percent — below records seen earlier in the week but still at levels deemed unsustainable in the long-term.

Earlier in Asia, Japan’s Nikkei 225 stock average slid 3.7 percent to 9,299.88 and Hong Kong’s Hang Seng dived 4.3 percent to 20,946.14. China’s Shanghai Composite Index lost 2.2 percent to 2,626.42.

The dollar edged down to 78.48 yen from late Thursday’s 79.02. On Thursday, Japan’s government intervened in markets to weaken the yen against the dollar to support exporters. Finance Minister Yoshihiko Noda said authorities acted to protect the economic recovery following the March 11 earthquake and tsunami.

The dollar had fallen as low as 76.29 yen on Monday. It hit a record post-World War II low of 76.25 yen in the days following the March 11 earthquake and tsunami.

___

Alex Kennedy in Singapore and Joe McDonald in Beijing contributed.

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13 Responses to Global stock meltdown: Is another recession on its way?

  1. griff

    August 5, 2011 at 12:58 pm

    Um, Earth to the media…The recession never ended.

  2. woody188

    August 5, 2011 at 3:49 pm

    The term “overvaluation” comes to mind. Wall Street priced in a recovery that never happened.

    • b mcclellan

      August 5, 2011 at 9:47 pm

      A good plow and the strength to pull it are all that’s left.
      Cash in now before they do,
      alas, it’s already too late.

      Credit is as imaginary as willful default, we have spirit too .

  3. Keith

    August 5, 2011 at 5:53 pm

    I wonder what would now be happening if we weren’t being also bombarded with such terms as “global meltdown” and “double dip recession” over and over (and over) again.

    It seems to me that the media is hyping this story for their own gain, and perhaps are CAUSING a good bit of it with their continual references to “the coming “doomsday”, “default” and busted “debt ceilings”.

    Indeed, while we as a nation should certainly should stop spending beyond our means, I still find it telling that NONE of this “doomsday” talk was on the front page a year or so ago.

    It’s hard to tell how much of it is real and how much of it is hype.

    • b mcclellan

      August 5, 2011 at 6:38 pm

      Instead of using the term media from now on,
      and if perchance were we to correctly make future reference of said static,
      it would be better known as the squelch and belch 24/7 odor coming from not multiples of, but from a singular dry sphincter.

      Pop said, damn paper ain’t fit to wrap fish in no mo…

  4. Rick

    August 5, 2011 at 8:20 pm

    The recession never ended for those 9%+ on the books and another 9% off thr books.

  5. Carl Nemo

    August 5, 2011 at 11:13 pm

    Standard and Poor’s rating service downgraded the U.S. credit rating to AA from AAA. Moody’s has held back, but could be soon to follow. S&P’s has threatened further downgrades if Washington doesn’t clean up it’s debt profile.

    The ratings agencies were not impressed with this faux, politically expedient last minute deal that was groomed and intiated in order to save face for the 2012 election cycle. These duopolists won while “We the People” lost again as usual.

    Notice none of our reps decided to pull the plug on our offshore adventurism in Iraq, Afghanistan, Pakistan and now Libya or considered deep sixing ‘Obamacare’ as they should have. These engineered zones of conflict have become nothing but combat related “make work” projects at tax debtor expense. Obamacare although not fully launched is going to turn out to be an ineffective, blood-sucking boondoggle that will make our current Medicare seem like a cakewalk not including greater fraud to come.

    Every sitting rep needs to get a seaboot launch over the stern of the USS America during the next election cycle from the President on down to local reps. No one and I mean no one should get a second term. It will take twelve years to get a complete jettison of Senatorial refuse. They’ll surely get the message when after several election cycles no one recognizes anyone from the previous Congress. Strangers to each other and all running scared relative to the will of their constituents rather than to the will of the lobbyists. They’ll get the message as to whom ‘butters their daily bread’ so to speak … : |

    Carl Nemo **==

  6. Davld Clark

    August 6, 2011 at 1:24 am

    Putting the fate of our economy and the welfare of our nation in the hands of the Federal Reserve and Wall Street is about the equivalent of putting our national defense in the hands of the Russians. Don’t worry, they will take care of us.

    f

  7. Carl Nemo

    August 6, 2011 at 2:26 am

    A spot-on analogy David Clark and scary one indeed. Too bad savvy Americans still refuse to believe they’ve been taken out by free-booting, “pirate capitalists” in high corporate places all facilitated by their totally owned and controlled Congress. They’ll sell us all out for a few dollars, euros, yuan or shekels more… : |

    Carl Nemo **==

  8. rick

    August 6, 2011 at 8:18 am

    The downgrade is from one of three reporting services and is based not on our ability to pay our debt but our ability for Congress to get its shyte together and have some viable plan in place. Right now it is just two pubescent girls fighting over a Justin Bieber autograph. Good luck with that. Now wait for the next two for their downgrade. If I recall Japan was downgraded a few years back.

  9. Carl Nemo

    August 6, 2011 at 12:25 pm

    Japan was downgraded a few years back rick. Most financial gurus thought it would affect their bond rates etc., moving them upward. Instead, yields went down. For whatever reason their currency is quite strong. The Bank of Japan intervened last week and dumped yen in order to weaken their currency which is having a negative effect on exports. Japan is primarily an exporting nation.

    Japan has a many of the same endemic problems as the U.S. in terms of “unpayable” debts to their citizens, now an aging population post the sweet spot of their manufacturing ascendancy after WWII.

    Carl Nemo **==

    • Almandine

      August 9, 2011 at 10:38 pm

      The Yen stayed strong thru low interest rate manipulation (like ours), which allowed Yen to be used for the “carry trade.” It worked especially well because of the inherent economic strength of Japan (decade long recession notwithstanding), which was guaranteed in part by our military alliance with them. Lots of profits were made via the carry trade, making them a welcome monetary partner.

  10. rick

    August 6, 2011 at 12:49 pm

    Thanks for the info, Carl, as I was recovering from a brutal Red Sox lost to a team from NY whose name escapes me.

    I love the “financial guru’s” and enjoy watching the talking heads on the Financial Network. I will occasionally jot down a “prediction” and invariably these “experts” are about as reliable as Carnac The Magnificent and just as funny.

    Sooner or later our “leaders” will get the message of a restructuring of the tax system and a lock down on debt.