Unabated stock sell-off deepens global crisis

BEAR TERRITORY Many global markets were reported to have entered bear market territory on Tuesday after one of the worst days on Wall Street since the collapse of Lehman Brothers in 2008. At left, a brown bear receives food at the Safari park in Fasano, Italy, on Aug. 4. Above, a broker at the stock market in Frankfurt, Germany, covers his face on Monday as share prices took a beating. AP/ AFP

BEIJING/SINGAPORE—The global economy stumbled deeper into crisis as stock markets slumped further on Tuesday, with investors losing confidence that the United States and Europe can rein in their debt burdens quickly and avert a double-dip recession.

Even as Asian stock markets pulled back from another day of staggering losses as they closed, European shares tumbled for an eighth session running, with news of an unexpected drop in British factory output in June highlighting the weakness of the economy.

The worsening market trauma has piled pressure on the US Federal Reserve to announce fresh measures of support for the world’s No. 1 economy at a regular policy meeting on Tuesday, but analysts said the Fed’s options are limited.

“You’ve got to a situation of capitulation and panic selling, and these things will keep running until we get some sort of policy response,” said Peter Hickson, managing director of global commodity research at UBS.

“Even policy response these days seems to be impotent in terms of the market sentiment at the moment. The market is asking whether policy makers have many more bullets to fire,” Hickson added.

Investors fear that, with confidence in the global economy’s prospects evaporating, financial markets will remain in a slump, feeding a vicious circle of pessimism.

The fear among investors has reached epidemic proportions, with the sell-off erasing $8.1 trillion—or 14.8 percent of market capitalization—from global stock markets since July 24.

Dumping equities, investors rushed for perceived safety in the Japanese yen, Swiss franc and gold—which hit another record high of $1,770/ounce on Tuesday.

MSCI’s all-country world index declined further 1.2 percent, and has now shed about 20 percent since peaking in May. The market rule of thumb is that a fall of that magnitude constitutes a “bear market.”

‘Weary resignation’

Monday saw the US market’s worst showing since December 2008. The Dow Jones industrial average fell 5.6 percent, and the Standard & Poor’s 500-stock index dropped 6.7 percent.

On Tuesday, Asian trading saw enormous volatility, with steep early declines partially reversed as the day progressed.

Seoul’s Kospi index closed 3.6 percent lower, and the Tokyo benchmark Nikkei 225 stock average fell 1.7 percent. In Hong Kong, the Hang Seng index fell 5.7 percent; in Shanghai, the composite index closed essentially flat.

Stephen Davies, chief executive of Javelin Wealth Management in Singapore, characterized sentiment in Asia as “weary resignation” rather than outright panic.

Davies said that the markets in general had been caught in a “negative feedback loop”—where declining markets fuel worries about the economic fallout of the turmoil, which in turn undermines sentiment further.

Alone among the big markets, the Sydney benchmark S&P/ASX 200 index closed in positive territory, with a 1.2-percent gain.

European stocks rallied at the opening but quickly fizzled. Just before midday, the Euro Stoxx 50 index, a barometer of eurozone blue chips, fell 4 percent, while the FTSE 100 index in London slid 3.6 percent.

Trading in US index futures suggested Wall Street stocks would fall modestly at the opening bell on Tuesday, fueling more declines in other markets.

China inflation

Amid the flight from risk in Asia, Europe and the United States, there was more bad news on Tuesday—this time from China, the stuttering global economy’s main engine of growth.

Official data showed industrial output of the world’s No. 2 economy grew at a slower pace and its annual inflation rate unexpectedly quickened to 6.5 percent in July.

The inflation pressure puts China’s central bank in a bind as it tries to keep prices in check without dragging down an economy that already faces increasing threats from abroad.

Even so, some analysts called on Beijing to act. “It’s time for Beijing to announce to the whole world that it will try to stimulate domestic demand again,” said Tang Yunfei, an analyst with Founder Securities in the Chinese capital.

But China may no longer be in a position to reprise its 2008 role of lifting the global economy.

When the Lehman Brothers bankruptcy triggered a worldwide slump, China implemented a stimulus package that helped buffer its own economy and buoy the world.

Blow to confidence

Global leaders have failed to reverse sliding markets since a blow was dealt to investor confidence by Standard and Poor’s downgrade of the US sovereign credit rating on Friday.

The downgrade heightened concerns that the twin-pronged crisis of a worsening of Europe’s debt woes and a faltering US economy raised the risks of a double-dip recession.

The European Central Bank (ECB) swept into the bond market to buy Italian and Spanish debt and sling a safety net under the eurozone’s third- and fourth-largest economies on Monday. But bickering has persisted in Europe over a longer-term rescue plan.

Investors also viewed the ECB move only as a temporary solution due to the sheer size of Italy’s bond market at $1.6 trillion. Doubts in the market about the ECB could sustain its bond-buying program.

In the United States, President Barack Obama called on Monday for urgent action on the US budget deficit, but his proposal for tax increases was promptly rebuffed by Republicans.

A pledge by finance ministers and central banks of the G-7 industrialized nations to provide extra cash if markets seize up has also provided little solace as their credibility wore thin.

‘Credibility deficit’

“Four years into the financial crisis, it is becoming increasingly clear that the biggest deficit is not in credit, but credibility,” Harvard University economist Kenneth Rogoff wrote in the Financial Times.

“Markets can adjust to a downgrade of global growth, but they cannot cope with a spiraling loss of confidence in leadership and a growing sense that policymakers are disconnected from reality,” Rogoff added.

“The speed and degree of deterioration in the situation is akin to what we saw during the failure of Lehman Bros, through the dot.com burst … and during the 1982 recession,” said Warren Hogan, chief economist at ANZ Banking Corp in Australia.

“We are looking at markets pricing for some sort of financial crisis. I think we are at a critical period now,” he said.

Focus on the Fed

With US stock index futures pointing to further losses for Wall Street on Tuesday, attention focused on Tuesday’s meeting of the Federal Open Market Committee as a possible prop for the market, though the Fed is expected to keep interest rates unchanged.

“Speculation is growing that Chairman Ben Bernanke may do more to help restore confidence with possibly another round of asset purchases,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

On the political front, Obama on Monday said he hoped the loss of America’s prized AAA credit rating would add urgency to US budget cutting plans.

He called for both tax increases and cuts to welfare programs as part of the $1.5 trillion in deficit reduction that a special committee would deliver in late November.

But Republican House Speaker John Boehner once again rejected Obama’s call, saying tax increases were “simply the wrong approach.” Reports by Reuters and New York Times News Service