World stock markets drop on US retail sales slump
Wednesday October 15, 10:45 am ET
By Pan Pylas, AP Business Writer
World stock markets drop on US retail sales slump as markets fear recession
LONDON (AP) -- World stocks sank Wednesday after poor U.S. retail sales date sharpened concerns that global efforts to restore confidence in the financial system will not be enough to stave off a deep recession.
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Wall Street followed Europe and most Asian stocks in heading lower, as the Dow Jones index of leading U.S. shares was down 302.58 points, or 3.3 percent, at 9,008.41, after U.S. retail sales data raised expectations that the world's largest economy is already in recession or about to move into one.
The FTSE 100 index of leading British shares was down 250.19 points, or 5.7 percent, at 4,144.02. Germany's DAX was 279.67 points, or 5.4 percent, lower at 4,919.52, while France's CAC-40 was 185.25 points, or 5.1 percent, down at 3,433.27.
The renewed selling pressure was stoked by a U.S. government report showing that retail sales plunged in September by a monthly 1.2 percent almost double the 0.7 percent drop analysts had expected.
"The 1.2 percent month-on-month slump in retail sales confirms beyond any reasonable doubt that real consumption shrank in the third quarter, the first decline in 17 years," said Paul Ashworth, senior U.S. economist at Capital Economics.
"The bottom line is that the economy is now in recession and the downturn is already looking more severe than either of the last two recessions," he added.
Fears about the outlook for the world economy have overtaken the relief the markets breathed at the start of the week on the unveiling of a series of bank rescue packages from governments around the world to restore confidence.
On Tuesday, the U.S. government followed Europe's lead and announced it is to pump some $250 billion into shares of its leading banks, including JP Morgan Chase & Co., Bank of America Corp., Goldman Sachs Inc. and Citigroup Inc.
The long-term key is whether the flurry of activity can actually break the logjam in credit markets and the early indications are that there has been some easing in rates and spreads, with further declines Wednesday.
The interbank lending rate for three-month dollar loans fell 0.09 percent to 4.55 percent, while the three-month Euro Interbank Offered Rate, or Euribor, fell almost 0.067 percentage points to 5.168 percent.
Though the rates are falling, the differential between the rate at which banks lend to each other and official central bank lending rates remain high, signalling a strong degree of mistrust still exists. In the U.S. the base central bank rate is 1.5 percent, in the euro area it is 3.75 percent and 4.50 percent in Britain.
Even if lending rates between banks continue to respond to the packages announced by governments around the world -- Greece became the latest Wednesday when it unveiled a euro28 billion ($38 billion) bank rescue plan -- they will do nothing to prevent a serious economic slowdown.
"Financial markets are refocusing on the fundamentals after spending the last few weeks concerned about the risks to the financial system," said Divyang Shah, analyst at the Commonwealth Bank of Australia.
"The equity market price action is reflective of these concerns, he added.
Those concerns were highlighted Wednesday in Britain with the news that unemployment rose by another 164,000 between June and August, to 1.79 million. The biggest rise since 1991 took the official unemployment rate up to 5.7 percent from 5.2 percent in the previous quarter.
And in Iceland, the central bank slashed its interest rates by 3.5 percent, bringing the policy rate down to 12 percent from a record high of 15.5 percent as the country struggles to deal with the impact of the global credit squeeze because of its heavyweight banking sector.
Concerns about the global economic outlook are clear also in the price of oil, which has fallen another $2.89 to $75.74.
Resource issues have also taken a hit on worries about slowing demand. Shares in Posco, the world's fourth-largest steelmaker, lost almost 8.7 percent in South Korea, while BHP Billiton Ltd, Australia's largest oil and gas producer, sank more than 4 percent.
Earlier in Asia, Hong Kong's Hang Seng Index lost 834.58 points, or nearly 5 percent, to close at 15,998.30 after rising more than 13 percent the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank.
Japan's Nikkei 225 index bucked the trend, however, ending up 1.1 percent at 9,547.47. The benchmark soared 14 percent in the previous session -- its biggest single-day gain ever.
In Hong Kong, Chief Executive Donald Tsang said the meltdown was even worse than the 1997 Asian financial crisis and would take a far bigger toll on the global economy.
Major exporters such as Japanese automakers slumped due to concerns over the U.S. economy, a vital market for Asian goods. Honda Motor Co. shed 5.23 percent, and Toyota Motor Corp. lost 1.88 percent.
In the currency markets, the euro was down on earlier in the day at $1.3597, while the dollar dipped against the yen for the first time in five days and is now trading above 101 yen.
Associated Press Business Writer Jeremiah Marquez in Hong Kong contributed to this article.
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