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US recession fears combine with concerns over Europe's banks to hit global stocks hard
MILAN (AP) ' Stock markets around the world plunged Thursday as rising signs of a U.S. recession combined with renewed worries over the financial health of Europe's banks.
After a few days of relative calm in the markets, especially when compared with the huge volatility of the previous week, investors are back in an unforgiving mood as the negative newsflow culminated in a woeful manufacturing survey from the Federal Reserve Bank of Philadelphia.
Its main indicator of factory activity slid to minus a near two and a half year low of 30.7 in August from a positive 3.2 reading in July. The slide suggests a recession is well and truly in prospect in the Philadelphia region ' anything below zero indicates a contraction in activity.
"This was obviously a terrible report, and, if sustained, readings like these would be consistent with recession," said Joshua Shapiro, chief U.S. economist at MFR Inc.
The woeful Philly Fed survey came in the wake of weekly jobless claims figures showing more Americans applied for unemployment benefits last week than a week earlier, and consumers paid more for gas, food and clothes last month, pushing prices up by the most since last spring.
Earlier, investor sentiment had been knocked by news from Japan that exports in July fell 3.3 percent from a year earlier to 5.78 trillion yen ($75.6 billion) as a result of the strong yen and the ongoing impact of the March 11 earthquake and tsunami. British retail sales also disappointed in July and a rebound in August looks unlikely, analysts said, following a wave of riots around England.
With so much gloomy economic news, it's hardly surprising that stocks have been on the retreat all day from the start of the Asian session.
In Europe, Britain's FTSE 100 lost 5.2 percent to 5,054.33, while Germany's DAX fell 6.71 percent to 5,549.54. France's CAC-40 was down 6.16 percent to 3,053.96.
The Dow Jones industrial average plunged 477 points, or 4.18 percent, to 10,932. The S&P 500 was down 4.42 percent, to 1,145.
The banks took a particular beating from fears over the global economic recovery combined with the prospect of a new tax on financial transactions and renewed concerns over Greece's bailout. French bank Societe Generale and British bank Barclays leading the way down, with losses of around 8 percent.
Analysts said bank stocks were particularly vulnerable as markets in general headed lower as investors continued to fret about the global recovery. Morgan Stanley's decision to cut its global growth forecasts for 2011 and 2012 served to highlight the exposure of banks' revenues in the coming period.
"Banking stocks have been decimated across Europe, with indiscriminate selling even in banks that maintain their exposure to the crisis is slim," said Will Hedden, a sales trader at IG Index.
Thursday's U.S. unemployment figures ' showing the number of people applying for unemployment benefits rose back above 400,000 last week ' appeared to echo an assessment earlier from Morgan Stanley that the global economy is dangerously close to a recession. The bank cut its global GDP growth forecasts to 3.9 percent in 2011 and 3.8 percent in 2012, from 4.2 percent and 4.5 percent, respectively.
"It won't take much in the form of additional shocks to tip the balance," Morgan Stanley said, reserving some optimism due to the health of the corporate sector and expectations that central banks will take more preventative action.
With investors' appetite for risk so evidently low, it's unsurprising that assets like gold and the Swiss franc were back in favor ' both are considered safe haven assets for investors to park their cash.
By contrast, the euro was in retreat, trading 0.8 percent lower at $1.4312, and oil prices also tanked alongside equities. Benchmark crude for September delivery was down $4.25 to $83.33.
Investors are keeping a close watch on developments with regard to Europe's debt crisis, after a little-noticed deal requiring Greece to put up collateral in order to receive a bailout loan from Finland triggered similar requests from several other eurozone countries. Potentially, these requests could complicate a broader euro109 billion ($157 billion) Europe-wide bailout of Greece.
The Netherlands, Slovenia, Austria and Slovakia said that they were also demanding collateral from Greece.
Earlier in Asia, Japan's benchmark Nikkei 225 closed down 1.3 percent to 8,943.76 after the export figures, while South Korea's Kospi lost 1.7 percent to 1,853.08.
Hong Kong's Hang Seng shed 1.3 percent at 20,016.27, while mainland Chinese shares lost ground for a third straight trading day on concerns over a possible interest rate hike and new restrictions aimed at cooling housing prices.
The Shanghai Composite Index lost 1.6 percent to 2,559.47 and the Shenzhen Composite Index lost 1.8 percent to 1,142.91.