Global markets drop sharply on US, Europe outlook
Global markets reflect worry about rising interest rates for eurozone's weakest nations and possibility of a US recession. Among global markets to tumble most: Germany, down 5.3 percent and France, down 4.7 percent.
World stock markets took a beating Monday over fears that the U.S. economy was heading back into a recession just as the European debt crisis was heating up and the eurozone's economic indicators were slumping.Skip to next paragraph
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Any troubles in the world's largest economy cast a long shadow over global markets, and a report Friday that the U.S. economy failed to add any new jobs in August caused European and Asian stock markets to sink sharply Monday.
But the news from Europe was also discouraging. Wall Street, which was closed Monday due to the Labor Day holiday, braced for losses Tuesday after the yields in so-called peripheral eurozone countries — Greece, Italy and Spain — rose sharply against those of Germany, whose bonds are widely considered a safe haven.
Although retail sales in the 17-nation eurozone rose unexpectedly in July, a survey of the services sector Monday showed a slowdown across the continent for the fifth consecutive month. The purchasing managers' index for the eurozone showed the services sector was still growing — unlike the manufacturing sector — but only barely. That will add pressure on the European Central Bank to keep interest rates on hold when it meets this week.
"There's so much uncertainty, so much fear, that investors don't know what to do," said David Kotok, chairman and chief investment officer at Cumberland Advisors. "I don't remember the last time stocks were so cheap and nobody wanted them."
Investors were also shaken by signs that the Italian government's commitment to its austerity program is wavering. Prime Minister Silvio Berlusconi's government has backtracked on some deficit-cutting measures, prompting EU officials to urge Italy to stick to its promised plan.
The difference in interest rates between the Greek and benchmark German 10-year bonds, known as the spread, spiraled to new records on Monday, topping 17.3 percentage points. Yields on the Greek bonds were above 18 percent.
Mario Draghi, the incoming chief of the European Central Bank, told a conference in Paris that among the common currency's problems was a lack of coordinated fiscal policies and that the solution was more integration.
He dismissed the idea of eurobonds — debt issued jointly by the eurozone countries. Some have argued this would help weaker countries borrow more easily because they wouldn't have to pay such high interest rates. But stable countries like Germany would likely see their rates rise.
Instead, Draghi suggested the eurozone should adopt rules that would require more budget discipline.
Renewed jitters over the eurozone debt crisis also contributed to the slump in financial stocks amid concerns the banks would need to raise new capital. Deutsche bank closed down 8.9 percent in Frankfurt, while Societe Generale in Paris shed 8.6 percent.
The U.S. unemployment crisis has prompted President Barack Obama to schedule a major speech Thursday night to propose steps to stimulate hiring. Until then, however, traders coming back from the U.S. holiday weekend will have little to hold onto.
The August jobs figure was far below economists' already tepid expectations for 93,000 new U.S. jobs and renewed concerns that the U.S. recovery is not only slowing but actually unwinding. U.S. hiring figures for June and July were also revised lower, only adding to the gloom.