Global markets in turmoil

“FEELS LIKE ARMAGGEDON” A trader gestures as he speaks on the phone at the Philippine Stock Exchange in the financial district of Manila on Monday, August 8, 2011. Stocks closed 2.4 percent lower on August 8 as analysts warned the Philippines would feel widespread effects from the unprecedented US ratings downgrade, possibly suffering conditions similar to the 2008 global financial crisis. AFP PHOTO / TED ALJIBE

Shrugging off reassuring comments from major central bankers and finance ministers over the weekend, investors fled from equities into assets they deemed safer—like gold which hit a record of $1,715 per ounce.

Oil prices extended recent sharp losses, trading below $84 a barrel on expectations that weaker global growth will crimp demand for crude. The US dollar was lower against the yen and the euro.

Stocks in the Asia-Pacific region plunged, wiping billions of dollars more off world share prices. Last week’s turbulence in financial markets chopped off an estimated $2.5 trillion from the value of global equities.

Among the major Asian markets, Hong Kong’s Hang Seng tumbled 3.8 percent, while Japan’s Nikkei 225 stock average dropped 2.2 percent. South Korea’s Kospi was down 3.8 percent after briefly diving nearly 7 percent.

Elsewhere in the region, Australia’s S&P/ASX 200 index fell 2.9 percent, Singapore’s benchmark dived 4.7 percent, Taiwan’s market slid 3.8 percent and China’s Shanghai Composite shed 3.6 percent.

The main Philippine Stock Exchange index declined 2.4 percent.

Feels like Armaggedon

“It’s not Armaggedon, but it feels like it,” said Hong Kong-based analyst Francis Lun, who predicted the Hang Seng index to sink below 19,000—a decline of a further 5 percent—before making any kind of comeback.

Banking shares were tainted by fears the sector could face heavy losses as the sovereign debt crisis in Europe continued to brew. Port operators—whose lifeblood of imports and exports would be at risk if the global economy goes bust—were stung badly.

Standard & Poor’s downgrade of the US sovereign credit rating to AA+ from the top-notch AAA on Friday heightened fears the world’s No. 1 economy may be headed back into recession.

Those anxieties have been compounded by signs that Europe’s debt crisis is threatening to engulf bigger economies such as Italy and Spain, which may need a combined bailout fund of $2 trillion to avert a default.

Temporary relief in Europe

A European Central Bank pledge to buy up Italian and Spanish bonds slashed the two countries’ borrowing costs, but most stock markets sank again on Monday following the downgrade of US debt.

European markets lost early momentum, and most were trading sharply lower amid mounting fears over the opening of US markets, when traders will have their first chance to respond to the Standard & Poor’s decision to cut the US debt rating.

Those fears trumped any relief that European markets got from the sharp fall in Italian and Spanish bond yields after the European Central Bank said it would buy the two countries’ bonds in order to help them avoid devastating defaults.

Britain’s FTSE 100 index of leading British shares dropped 1.7 percent, while France’s CAC-40 fell 2 percent.

Germany’s DAX was 2.3 percent lower.

Sell-off in US markets

Sentiment in Europe has not been helped at all by the expected sell-off at the open of US markets—Dow futures declined 2.1 percent while the broader Standard & Poor’s 500 futures fell 2.4 percent.

These futures figures suggested Wall Street was headed for another tough session on Monday as investors tried to assess the implications of the downgrade by Standard & Poor’s.

By the time the rating agency acted late Friday, Wall Street had suffered its worst week since the financial crisis, with the Dow Jones industrial average falling 5.75 percent, a slide punctuated by a 512-point drop on Thursday.

On Sunday, Wall Street traders and strategists trekked to their offices in scenes reminiscent of the fateful weekend before Lehman Brothers collapsed in 2008.

Loss of confidence

Bank of America Merrill Lynch, Barclays, Credit Suisse and Morgan Stanley all hosted conference calls for anxious investors, and traders plotted strategy for what they expected to be a tumultuous day on Monday.

“Markets have lost confidence in the economic recovery and policy makers. This is increasing the risk of bringing about a self-fulfilling prophecy, with markets driving down the economy,” Robert Subbaraman, chief economist for Asia at Nomura, said in a conference call on Monday.

The market worries extended far beyond the single issue of the credit rating, to the wider US economic recovery, which appears to be floundering.

Adding to the jitters, worries over the financial health of Italy and Spain have continued to mount in recent days.

This prompted the European Central Bank on Sunday to conduct an emergency conference call, which culminated with a statement signaling that it would intervene more aggressively in bond markets to prevent borrowing costs for Spain and Italy from rising to unsustainable levels.

The move was an acknowledgment that Europe’s previous efforts to stanch its debt crisis have fallen short, and underscored the importance of propping up Spain and Italy.

Those two countries are central pillars of the euro zone, unlike the countries on the periphery—Portugal, Greece and Ireland—that have already received bailouts.

The financial collapse of Spain and Italy would threaten the euro currency and intensify the turbulence in world markets.

Mission impossible?

Shortly afterward, finance officials from the Group of 7 nations—including the US Treasury Secretary Timothy F. Geithner and Federal Reserve Chair Ben S. Bernanke—held a conference call to discuss the US downgrade and other challenges.

In a statement issued after the nearly two-hour meeting, the group said it was ready to “take all necessary measures to support financial stability and growth.”

The assuring words of US policy makers failed to stop the global market rout on Monday. The darkening mood was caught by economist Nouriel Roubini writing in the Financial Times.

“The misguided decision by Standard & Poor’s to downgrade the US at a time of such severe market turmoil and economic weakness only increases the chances of a double dip and even larger fiscal deficits,” Roubini warned.

“So can we avoid another severe recession? It might simply be mission impossible.” Reports from AP, AFP, Reuters and News York Times News Service