World markets sink, yen surges on recovery fears
The Associated Press
Friday, Aug. 27, 2010 | 12:24 a.m.
The drop in global stock markets accelerated Tuesday after surprisingly weak U.S. housing figures reinforced fears that the world's largest economy may be heading back to recession, barely a year after emerging from its deepest downturn since World War II.
As worries over the U.S. economic slowdown swelled, the Dow Jones industrial average briefly dropped below 10,000 for the first time since early July, while the yen surged to a 15-year high against the dollar and a nine-year best against the euro.
An hour into trading, the Dow was 153.41 points, or 1.5 percent, lower at 10,021 while the broader Standard & Poor's 500 index was 17.72 points, or 1.7 percent, lower at 1,049.64.
In Europe, the FTSE 100 index of leading British shares was down 90.77 points, or 1.7 percent, at 5,144.07 while Germany's DAX fell 126.86 points, or 2.1 percent, to 5,884.05. The CAC-40 in France was 66.60 points, or 1.9 percent, lower at 3,486.63.
The selling in Europe and on Wall Street was given further impetus by the news that sales of previously occupied U.S. homes fell to their lowest level in 15 years in July. The National Association of Realtors said sales dropped 27 percent to a seasonally adjusted annual rate of 3.83 million. June's sales, already quite weak, were revised down to 5.26 million.
The U.S. housing market was the original catalyst behind the financial crisis and the global recession and its failure to stabilize is stoking renewed fears about the sustainability of the U.S. recovery and reigniting talk that the Federal Reserve will have to pump more money into the economy to stave off a double-dip recession and deflation.
"It is becoming abundantly clear that the housing market is undermining the already faltering wider economic recovery," said Paul Dales, U.S. economist at Capital Economics. "With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse."
The U.S. housing data were not the only piece of bad news Tuesday.
A 0.1 percent monthly decline in Canadian retail sales in June, following a 0.4 percent drop in May, had weighed on sentiment as Wall Street opened. The fear is that a sharper slowdown in the U.S. is infecting economic activity in Canada.
The retreat in Europe and the U.S. came after many of Asia's markets closed lower. Japan's Nikkei index led the declines, closing down 121.55 points, or 1.3 percent, at 8,995.14 _ slipping under the 9,000 level for the first time since May 2009.
The main reason behind the Nikkei's drop was the rise in the yen. By mid afternoon London time, the dollar was 1.6 percent lower at 83.80 yen, just above its earlier 15-year low of 83.61 yen, while the euro was 1.1 percent lower at 106.42 yen, about a cent higher than its earlier nine-year low of 105.44 yen.
The worry is that the rising yen will make Japanese exports less competitive in the international marketplace and limit already paltry economic growth. Figures last week showed that Japan grew by a tepid 0.1 percent quarterly rate in the second quarter, allowing China to overtake the country in terms of economic output for the first time ever.
The scale of those concerns were evident in the performance of Sony Corp., which closed down a whopping 3.7 percent.
With Japan's economy under pressure and the U.S. recovery losing momentum, investors are getting increasingly worried that the global economic recovery has run its course _ the yen is widely considered one of the safest assets to hold and therefore advances when investor appetite for risk declines.
Japan's policymakers will be under pressure to do something about the yen's continued appreciation, though the absence of any talk of intervention in Monday talks between the Bank of Japan and Japanese Prime Minister Nato Kan indicates that nothing is afoot.
Though the dollar has fallen against the yen, it continues to advance against the euro. By mid morning London time, the euro was down 0.2 percent at $1.2616, far below the four-month high of $1.3333 it hit less than three weeks ago.
"The market is very sensitive to negative economic data right now, which is expected to continue feeding into safe haven currencies," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.
The main point of interest this week will be Friday's latest speech on the state of the U.S. economic recovery from Federal Reserve Chairman Ben Bernanke. His speech will come in the aftermath of the latest estimate for second quarter U.S. economic growth _ a number of economists think that the 2.4 percent annualized growth previously estimated will be reduced, possibly to as little as 1.5 percent.
Uncertainty about the global economy also weighed on oil prices. Benchmark crude for October delivery was down $1.10 at $72 a barrel in electronic trading on the New York Mercantile Exchange.
Elsewhere in Asia, Hong Kong's Hang Seng sank 1.1 percent at 20,658.71, South Korea's Kospi fell 0.4 percent to 1,760.53 and Australia's S&P/ASX 200 dropped 1.1 percent to 4,381.30.