World stock markets tumbled Friday morning, with many benchmark indexes down in the 2% to 8% range, as signs that the global economic downturn might become a prolonged recession plagued the financial system.
Redemptions appeared to be a large part of the problem all over the globe, as jittery investors called back their bets with money managers. Poor profit reports from international titans such as Sony (SNE) exacerbated the trouble.
At this point, almost no country appears to be immune. The developed nations are struggling with a banking crisis, resource-rich nations are hurt by tumbling commodity prices and less-developed countries may find it even tougher to advance if cash and deals with established countries aren’t available.
However, there were some positive signs, including a deal the International Monetary Fund reached with struggling Iceland. In addition, as the trading day went on, markets in Europe and the U.S. appeared to be stanching the bleeding as they reined in some of the losses.
“The shift from credit market weakness to stability in the face of equity weakness signals a new chapter for financial markets,” Jeffrey Rosenberg, Bank of America Securities’ head of credit-strategy research, wrote in a research note. “Credit spreads in cash high grade more than price in the deepest recession and high yield reflect a more typical recession. To the extent global equities do not yet reflect this scenario, equity prices will need to continue to decline.
“The signs of the bottom are here” in credit markets, Rosenberg continued. “We would count a limit down day in equities as one more of those signs.” A limit down day would be a session in which many countries trade down to their circuit breakers or other maximum decline limits allowed in one day.
Asia-Pacific
Asian markets were hit hard by lowered company profit expectations, with India’s Bombay Sensex ending down 11%, Hong Kong’s Hang Seng was off 8.3% and Japan’s Nikkei closed down 9.6%. The DJ Asia Pacific Index declined 5.9%.
The Asian economies didn’t get as involved with the credit bubble as many of the Western countries did. But they tend to rely on exports or commodities to fuel their economic growth; so as commodity prices tumble and consumer spending in the U.S. and Europe falter, Asian countries are suffering.
Asia "may not be levered in the strict sense of reliance on global credit," Stephen Roach, Morgan Stanley’s Asia chairman, told The Wall Street Journal. "But it's certainly levered to the global economy."
Japan was hurt in particular after tech giant Sony cut its full-year profit estimate by nearly 40%, which combined with a rising yen to pummel investor sentiment. South Korea’s Seoul Composite declined 10.6% after profit reports from Samsung Electronics and Kia Motors came in worse than expected, and its Kospi index is now down 35% in October alone.
A Korean securities firm trader told Dow Jones Newswires that "players are aiming to secure liquidity rather than profit. All they consider now is, 'how will I survive this crisis?'"
Europe
Fears of recession and weak industrial activity plagued the European markets after the U.K.’s economy contracted more than expected and automotive companies came out with dismal news.
The U.K.’s Office of National Statistics reported that the country’s economic output fell 0.5% in the third quarter, greater than an expected 0.2% drop. It was the first time since 1992 that Britain’s economy had contracted. The benchmark FTSE 100 closed down 5%.
Auto makers were depressed after Swedish truck maker Volvo AB announced that its truck orders in Europe totaled 115, down from 41,970 last year, and French auto makers Renault and Peugeot-Citroen issued full-year profit warnings.
The DJ Euro Stoxx Index closed down 4.5%.
One of the biggest downers in Europe was Russia, where the DJ Russia Titans Index plunged 14.1% amid concerns that falling commodity prices could severely hurt the economy, in addition to the global crisis. Both of the country’s major stock indexes had trading halted until Tuesday, though regulators can restore trading anytime Monday. Russian markets are down about 75% from their May peak.
Iceland, one of the countries that has been hardest-hit by the mortgage and financial crisis because its banks overindulged in leverage, has reached a $2.1 billion loan deal with the International Monetary Fund, the country’s government announced. The loan is under a two-year stand-by arrangement, and the country will be able to draw on about $830 million almost immediately. That loan could pave the way for other countries that have sought such loans, such as Hungary, Ukraine, Belarus and Pakistan, to arrange similar deals.
Americas
The DJ Americas index fell 4.4% as countries that have already been buffeted by big selloffs took it on the chin again. Argentina’s benchmark Merval Index was down 8.3%, and Brazil’s Bovespa Index was off 5.9%.
Argentina’s markets have been spiraling downward ever since the government made a move to nationalize private pension plans. The central bank there, along with its counterpart in Brazil, has been intervening heavily in recent days to try to maintain order.
Peru’s stock market was halted around 11:06 Eastern time, with Lima’s broad general index down only about 0.8%. A trader told Dow Jones Newswires that there were concerns the market could be driven lower by fear-induced selling. Stocks resumed trading, and were off 6.9% by late afternoon. That happened despite the Peruvian central bank forecasting 2008 gross-domestic-product growth at 9.3% and 2009 growth of 6.5%.
In the U.S. prior to the open, index futures hit “limit down,” meaning they were not allowed to be traded any lower. However, the major indexes ended down just a little more than 3% each, so the situation wasn’t as bad as it was in many other countries – or, indeed, as bad as many had feared heading into the opening bell.
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