Global stocks slide on fear of fresh recession

The euro fell to its lowest level in 18 months, and bank stocks on both sides of the Atlantic took a beating.

Investors seemed fearful that the $957 billion bailout package for Greece and other nations, while providing short-term protection against default, might drag out the economic pain and hurt the financial system in the process.

A continued hammering of the euro would make European exports cheaper, but the side effect would be weaker American exports, potentially dragging the US — and the rest of the world — back toward recession. “What you get is markets worrying about a whole cascading of weakness stemming from Europe being transmitted through the euro to the United States,” said Martin Murenbeeld, chief economist at DundeeWealth Economics in Toronto.

One by one on Friday, markets across Asia, Europe and then the US sank lower under the renewed pessimism about European growth and the instability stemming from the Continent.

The price of oil continued to fall as traders bet on slower global growth, and gold continued to rise as an asset perceived by investors as a safer, long-term store of value in times of stress. In the US, the Dow Jones industrial average, which had been seesawing since the rescue package was announced on Monday, declined 162.79 points, or 1.51 percent, to 10,620.16 on Friday. The broader Standard & Poor’s 500-stock index fell 21.76 points, or 1.88 percent, to 1,135.68. The Nasdaq composite index dropped 47.51 points, or 1.98 percent, to 2.346.85.The Treasury’s 10-year note rose 20/32, to 100 12/32. The yield fell to 3.45 percent, from 3.53 percent late on Thursday.
Bank stocks led the market decline, mainly over worries about Europe. Another factor might have been the Senate’s approval of a proposal on Thursday that could cut bank revenue by imposing limits on fees they can charge businesses to process debit card transactions. The Senate also approved an initiative to end reliance on major credit rating agencies, putting further pressure on financial stocks. Last Friday, US markets gave back all their gains for the year amid the immediate concerns over European defaults. Then on Monday, they roared back at the opening bell on the news of the nearly trillion-dollar intervention, sending the Dow up 404.71 points.

The S&P 500 finished 24.8 points higher for the week and is up 1.85 percent so far this year. The Nasdaq was up 81.21 points for the week and is up 3.42 percent so far this year. In European trading on Friday, the Euro Stoxx 50 index of blue chips ended the session down 3.7 per cent. In Paris, stocks slumped 4.6 percent; in London, the FTSE 100 lost 3.1 percent; and in Germany, the benchmark DAX index lost 3.1 percent of its value.
The stock market in Spain fell 6.6 percent. The euro had rallied briefly to start the week, signaling initial enthusiasm about the rescue package. But then it dropped steadily as the week wore on and fell again on Friday, to $1.2385. Since the start of the year, the currency has fallen 13 percent against the dollar and 14 percent against the yen.

Economists have begun worrying that the dollar’s appreciation might push up the price of American exports to Europe enough to place a further drag on growth in the US. The sharp worldwide market decline came only five days after the European Union and the International Monetary Fund hoped their package would signal a “shock and awe” commitment to ending the Continent’s crisis. As far as the markets are concerned, Caron said, “It does not fix the problem of whether Europe will be able to climb out of this hole,”  Morgan Stanley Global Head (interest rate strategy) Jim Caron said. There was also a growing worry o nFriday about how governments would find the $957 billion to pay for the rescue package, economists said, and a growing suspicion that central banks might eventually resort to allowing inflation to lessen groaning debt loads. The European Central Bank agreed to help calm the financial turmoil by buying government bonds for the first time in its history this week. Further, interest rates on bonds in Greece, Spain, Portugal and other countries had risen sharply in recent weeks as investors feared governments might default on their debts. The rescue package appears to have quieted those fears somewhat. But now investors seem to be worried about a slowdown in growth caused by governments cutting back spending.

There are also indications that the rescue deal has worsened tensions among the European capitals. Spanish newspaper El Pais reported Friday that French President Nicolas Sarkozy had pressured German chancellor Angela Merkel to back the rescue effort.

But with rumors like that swirling through markets, investors were saddled with uncertainty, a sure prescription for selling.
The New York Times