Tuesday, January 22, 2008

World markets plummeted yesterday on worries about the U.S. economy, with gigantic losses ranging from 4 percent in Tokyo to 7.5 percent in Bombay and Madrid and delivering the biggest stock losses since the 2001 terrorist attacks.

While U.S. markets were closed for the Martin Luther King holiday yesterday after suffering their worst selloff in five years last week, foreign investors fretted about the affects on their own economies if the vaunted U.S. consumer succumbs to recession. Investors here and abroad were not comforted by the prospect of a $150 billion stimulus package designed to put cash into consumers’ pockets.

“Anxiety is spreading across the globe that the U.S. is headed towards recession,” said Bill Greiner, chief investment officer at Scout Investment Advisors of Kansas City, Mo. He noted that not only does the U.S. economy remain the largest in the world, but the U.S. consumer fuels about 40 percent of consumer spending worldwide.

“If the U.S., and specifically the U.S. consumer, slows discretionary purchases, the rest of the world is going to feel it” in lost exports to the United States, he said. The U.S. is the biggest and most lucrative export market for most countries, from China to Brazil.

Doubts about the U.S. economy, which already have shaved nearly 15 percent off U.S. stock indexes since reaching highs in October, triggered the worst one-day bloodbath in world markets in more than six years and brought the losses on many indexes below U.S. levels.

“The situation is serious,” International Monetary Fund Director Dominique Strauss-Kahn told reporters in Paris. “All the world’s countries are suffering from the slowdown in growth in the United States,” he said, adding that “stock markets did not respond well, it would seem, to the [stimulus] package.”

Developed countries in Europe with close links to U.S. financial markets have been hurt the most, Mr. Strauss-Kahn said, but developing countries like China and India that have been growing robustly but also benefit substantially from wide-open U.S. markets stand to lose from a U.S. downturn as well.

The downdraft began in Asia, where China’s Shanghai stock index nose-dived 5 percent, Hong Kong’s Hang Seng Index lost 5.5 percent and Tokyo’s Nikkei average shed nearly 4 percent. For an idea of the magnitude of such losses, a 6 percent decline in the Dow Jones Industrial Average would entail an unprecedented 780-point drop.

The 7.4 percent collapse in India’s Sensex index was its largest ever. Feeding the Asian turmoil were reports of a $2.4 billion loss at the Bank of China from investments in U.S. mortgage securities.

The market rout got worse in Europe, where major banks have even bigger investments in troubled U.S. mortgage securities and deeper ties to ailing U.S. banks and brokerages. The downgrading on Friday of Ambac, a top insurer of mortgage securities, led to big losses in European bank and insurer stocks yesterday, including Allianz, BNP Paribas, ING Group and Swiss Reinsurance Co.

Germany’s DAX index plunged 7.2 percent, France’s CAC 40 dived by 6.8 percent and Britain’s FTSE 100 sank 5.5 percent — all in their worst performance since 2001. The 7.5 percent drop in Spain’s Ibex index was its worst since 1991.

Emerging markets joined in the plunge, with Brazil’s Bovespa stock index sliding 6.6 percent, Mexico’s Bolsa losing 5.4 percent and Russia’s Micex index plummeting 7.5 percent. Canada’s markets also took a drubbing, with its Standard & Poor’s composite index falling 4.8 percent.

The huge one-day declines brought the cumulative losses on most stock indexes in Asia and Europe to the same or lower than those posted by U.S. stock indexes. About 36 markets in the world slipped into bear market territory with a decline of 20 percent or more, according to Bloomberg News.

“The panic is on,” said Gerald Celente, director of the Trends Research Institute, noting that world stock markets have lost $5 trillion in value since the beginning of the year. He said U.S. leaders, including Federal Reserve Chairman Ben S. Bernanke, are in denial about the extent of the economic problems — evidenced by a 307-point drop in the Dow while Mr. Bernanke was testifying last week.

U.S. stocks are expected to open sharply lower today as futures on the Standard & Poor’s 500 index fell 4.5 percent in foreign trading yesterday.

Mr. Greiner noted that all the drama in overseas markets occurred merely on fears of a U.S. recession, despite much talk in the markets last year that the world economy had decoupled from its traditional reliance on the U.S. economy for growth.

“The trouble our economy is facing will spread overseas, impacting foreign economies — perhaps not as broadly and as deeply as our own,” he said. “But the ‘delinking’ story that was floating around the market last year is, well, in a word, in need of ‘debunking.’ ”

The U.S. and other markets have further to fall should a recession occur, he added. During previous recessions, U.S. stock losses averaged 25.5 percent.

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