Fears that the global economy is hurtling toward recession sparked fresh turmoil on financial markets yesterday, with Asian and European stocks mirroring sharp overnight falls on Wall Street.
Hopes that authorities have thwarted a financial system meltdown were overshadowed by growing worries that the global economy faces a deep and prolonged downturn.
“Concerns about the impact of the financial crisis on the real economy are growing rapidly,” said Kazuhiro Takahashi, senior analyst at SMBC Daiwa Securities.
Tokyo sank 6.79 percent by the close, ending a three-day rebound as concerns deepened over faltering world economic growth.
Hong Kong lost 5.2 percent, dragged by Citic Pacific after its earlier warning that it was facing a potentially huge foreign exchange loss, dealers said.
In morning trading in Europe, the London market was down 1.35 percent, Paris lost 2.12 percent and Frankfurt fell 2.37 percent.
“Players are particularly concerned about the situation in Europe. Volatile trading is expected to continue for now,” Takahashi said.
Elsewhere in Asia, stocks dropped 5.1 percent in Seoul to finish at their lowest level for three years, while Sydney ended with a 3.4 percent loss.
The turmoil spilled over into currency markets. The euro hit a near two-year low against the dollar and the British pound plunged to a five-year trough on speculation of further European interest rate cuts to spur economic growth.
Sterling took a further knock after Bank of England Governor Mervyn King said that Britain was “likely” entering a recession.
Stocks fell despite an offer by the US Federal Reserve to supply up to US$540 billion of help to money market mutual funds in its latest response to the credit crunch.
The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks as the global financial crisis worsened.
But while credit markets have showed signs of a thaw recently, analysts warned that companies will still find it harder to gain access to credit, while the outlook for their profits is also growing bleaker.
“Credit conditions remain fragile, despite coordinated monetary easing and a series of capital injections by [the G7] to support their banks,” Nomura equity strategist Sean Darby wrote in a note.
The Canadian central bank, meanwhile, declared the US economy in recession as it announced a second unscheduled interest rate cut this month to stimulate domestic demand.
The contracting US economy would lead to a “mild” global recession, the bank warned, following weeks of turmoil on financial markets and tightening credit.
But an IMF senior official said Europe should avoid the biggest risks posed by the global financial shock thanks to its coordinated “crisis management” measures.
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