Business

Wall Street follows European sell-off on economy fears

  • 22 September 2011
  • From the section Business

US shares dived as warnings that the global economy was in the "danger zone" sparked panic among investors.

The Dow Jones share index fell 3.5% as part of a global sell-off that saw the main indexes in the UK, Germany and France fall about 5%.

It followed grim warnings from the International Monetary Fund and World Bank about global economic health.

The comments came after the Federal Reserve warned that the US economy faced "significant downside risks".

The Dow closed at 10,733.83 points, but was at one stage 522 points lower, or 4.7%. The S&P 500 and Nasdaq indexes closed just over 3% down.

As well a falling share prices, oil was down sharply on worries that a global slowdown will hit demand. Brent crude for delivery in November tumbled $4.71 to $105.65 a barrel. West Texas crude dived $5.22 to $80.70 a barrel.

"Markets rely on confidence and certainty. Right now there is neither," said John Canally, an economic strategist at LPL Financial.

This latest bout of fear among investors began on Wednesday after the Federal Reserve warned that the US economy faced "significant downside risks".

On Thursday, Christine Lagarde, head of the International Monetary Fund, said that the economic situation was entering a "dangerous place".

Mrs Lagarde told a news conference at the IMF's annual meeting in the US that the "path to recovery is narrower that three years ago," when developed economies sank into recession.

She said that international leaders must act quickly on fiscal consolidation, the repair of household debt, and reforms of the public sectors. "Time is of the essence," she said.

It was key, she added, that the banks were supported because international lending was essential to "fuel growth".

Earlier the president of the World Bank, Robert Zoellick, said the world's economy was "in a danger zone".

He said that a double-dip recession was "unlikely", but added: "My confidence in that belief is being eroded daily by the steady drip of poor economic news.

"Delays will narrow choice and make them more costly - we all have a stake in this succeeding."

Also on Thursday, US Treasury Secretary Timothy Geithner said that the eurozone crisis and the political divisions in the United States were the biggest threats to the global economy.

In early 2011, high oil prices and the Japan earthquake slowed economic growth substantially, but Mr Geithner said those two shocks had started to fade.

"The two other clouds still over us are the European crisis and the deep concern that you can see across the world and around the country about whether the political system in the United States is up to the challenges we face."

Bond plan

On Wednesday, the US Federal Reserve had warned: "Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated.

"There are significant downside risks to the economic outlook, including strains in global financial markets."

It also unveiled a stimulus plan - dubbed Operation Twist - designed to help stimulate the flagging US economy.

The Fed will sell about $400bn (£260bn) of short-term bonds and buy longer-term debt. Buying bonds pushes the price up and lowers the interest rate, or yield.

The Fed hopes the move will help to keep long-term interest rates low, thereby boosting mortgage lending and loans to businesses.

The policy, the first of its kind since the early 1960s, does not inject any new money into the economy.

A number of analysts, some of whom were expecting the Fed to expand on its two previous rounds of quantitative easing (QE), under which it created money to buy assets to try and boost demand, expressed scepticism at the Fed's latest move.

"It seems the market doesn't believe Operation Twist is enough to kick start the spluttering economy," said Ben Potter, market strategist at IG Markets.

"This, [together with] a very downbeat outlook... seems to have unsettled markets even further."

The UK and six other G20 countries have written to France - the current G20 president - calling for swift action to resolve the eurozone and US debt problems.

The move by the Fed comes amid deepening gloom about the global economy, with the International Monetary Fund cutting growth estimates for the US, Europe, and Japan.

Figures released on Thursday indicated that the eurozone's private sector contracted in September for the first time in two years.

Markit's purchasing managers' index (PMI) of activity dropped to 49.1, from 51.5 last month. A reading below 50 indicates contraction.

On Wednesday, the Bank of England said members of its Monetary Policy Committee had considered a new round of quantitative easing to pump money into the economy.

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