World stocks fall, spooked by big losses in China

[August 19, 2009]  LONDON (AP) -- World stocks sank Wednesday, with European indexes spooked by a 5 percent drop in China that strengthened fears stocks have become overpriced after this year's powerful rally.

With a lack of new economic data across most of Europe, investors focused on the heavy losses in Asia, driven by fears that the Chinese government's easy credit policy to support the economy will not fuel a sustainable recovery there.

Germany's DAX fell 65.60 points, or 1.3 percent, to 5,185.14 while Britain's FTSE 100 dropped 41.11 points, or 0.9 percent, to 4,644.67. France's CAC-40 fell 31.02 points, or 0.9 percent, to 3,419.67.

Wall Street appeared headed down as well. In futures trading, Dow industrials futures were down 86 points, or 1.0 percent, at 9,121 and Standard & Poor's 500 futures lost 9.9 points, or 1 percent, to 979.70.

In Shanghai, the main index plunged over 5 percent at one point before closing down 125.30 points, or 4.3 percent, to 2,785.58.

The drop came on the heels of a steep fall in world markets Monday, when investors were dismayed by weakness in American consumer spending. That seemed to many to augur an end to the five-month rally that has boosted some benchmarks over 50 percent.

"We've had a very strong run and people are a little unnerved by what's going on in China, so it seems like a good opportunity to take some money off the table," said Adrian Mowat, chief Asian and emerging market equities strategist at JP Morgan in Hong Kong.

China's benchmark index has lost nearly 20 percent since Aug. 4 on worries about corporate profits, the strength of China's recovery and possible changes in Beijing's easy credit policy that has helped to fuel the bull run in Chinese stocks this year.

"Investors are afraid there are no fundamentals to support the rally," said Cai Xiang, a Sinolink Securities analyst in the western city of Chengdu.

World stock markets have mostly been rising since March on relief that the economic crisis will be shorter than previously feared. But once many indexes reached new highs for 2009, analysts started wondering whether stocks are overvalued. Considering trading volumes are limited by the summer holiday season, the uncertainty has caused markets to hover in a range over the past few weeks.

Stuart Bennett, senior foreign-exchange strategist at Calyon in London, said European stocks may be overreacting to the Chinese market movements. He said losses may be short-lived, considering the speed with which Monday's sharp drop was quickly stabilized on Tuesday.

"The ups and downs over the past few days and the inconsistent reaction to data and news still leads to the conclusion that the market does not know which way to point," he said.

In Britain, minutes published from the Bank of England's latest policy meeting showed three rate-setters wanted a larger monetary stimulus than announced. Led by governor Mervyn King, the three policymakers wanted to increase the amount of quantitative easing, or increasing the supply of money in the economy, by 75 billion pounds, not just 50 billion pounds. That suggests the central bank may not be done with efforts to spur the economy.

"If the recovery is weaker than the Monetary Policy Committee (MPC) expects, there is a good chance that the MPC will extend the quantitative easing program again in November," said Vicky Redwood, economist at Capital Economics.

Elsewhere in Asia, Japan's benchmark Nikkei 225 stock average lost 80.96 points, or 0.8 percent, to 10,204.00. Hong Kong's Hang Seng shed 1.7 percent to 19,954.23.

South Korea's Kospi fell 0.3 percent, India's Sensex was 1.3 percent lower and Taiwan's index was flat. Australia's benchmark lost 0.2 percent. Indonesia's market, another investor favorite this year, was down 2.7 percent.

Overnight in the U.S, stronger-than-expected retail earnings reports and the latest reading on housing sent markets to a higher finish following a bout of heavy selling on Monday.

The Dow rose 82.60 points, or 0.9 percent, to 9,217.94. The Standard & Poor's 500 index gained 9.94 points, or 1 percent, to 989.67, while the Nasdaq composite index rose 25.08 points, or 1.3 percent, to 1,955.92.

Oil prices fell in Europe, losing 22 cents to $68.97 a barrel. On Tuesday, the contract gained $2.44 to settle at $69.19.

The dollar fell to 94.29 yen from 94.70 yen, while the euro fell to $1.4102 from $1.4131.

[Associated Press; By CARLO PIOVANO]

Associated Press writer Jeremiah Marquez in Hong Kong and AP researcher Bonnie Cao in Beijing contributed to this report.

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