World stocks drop amid mounting economic gloom

[January 15, 2009]  LONDON (AP) -- World stock markets dived Thursday, particularly in Asia where investors played catch-up with previous losses in Europe and the U.S., after dismal U.S. retail sales data and fresh worries about the global banking system.

Every market in Asia suffered steep declines, with broad selling seen across industries from energy to financials to exporters. A record 16.2 percent fall in Japanese machinery orders in November from the previous month further hurt sentiment in Asia.

The Nikkei plunged 415.14 points, or 4.9 percent, to 8,023.31, while Hong Kong's Hang Seng Index fell 461.65 points, or 3.4 percent, to 13,242.96 after earlier sinking about 5 percent.

South Korea's Kospi dropped 6 percent to 1,111.34, while markets in Australia and Taiwan fell 4 percent or more. Singapore's benchmark was down 3.4 percent but Shanghai stocks were only slightly lower.

In Europe, the losses were less marked, as the major indexes had tumbled almost 5 percent on Wednesday and because of expectations the European Central Bank will cut interest rates later in the day.

The FTSE 100 index of leading British shares was down 16.81 points, or 0.4 percent, at 4,163.83, while Germany's DAX dropped 20.85 points, or 0.5 percent, to 4,401.50. France's CAC-40 fell 23.30, or 0.8 percent, to 3,028.70.

Stock markets are suffering one of their sharpest drops since November as investors' hopes of a turnaround in the world economy by the second half of the year have diminished amid increasingly grim economic and corporate news. The rally in stock markets over December and the early days of 2009 was largely founded on expectations that the recession would start to show signs of ending, at least by the second half of this year.

But investor sentiment was pummeled Wednesday after a U.S. government report showed retail sales dropped 2.7 percent last month, more than double the decline economists had expected.

"The American consumer is -- as we say in the U.S. -- toast, finished, done," said Stephen Roach, chairman of Morgan Stanley Asia Ltd. in Hong Kong. "The consumer is going down for the count here, and there's more to come."

Meanwhile, a flood of negative news in the financial industry reignited worries that international banks would suffer ever-bigger losses and be forced to raise billions more in capital as the world economy deteriorates.

The financial health of the world's banks also resurfaced as a major concern in markets when Citigroup Inc. confirmed it is to merge its Smith Barney brokerage into a joint venture with Morgan Stanley, relinquishing control in exchange for $2.7 billion in badly needed cash.

Reports have also surfaced that the U.S. government is close to supplying Bank of America Corp., the nation's biggest bank by assets, with billions of dollars more in aid after it agreed to acquire debt-ridden Merrill Lynch & Co.

Meanwhile, analysts at Morgan Stanley warned that HSBC PLC may have to raise up to $30 billion and halve its dividend to plug a capital shortfall.

Investors will be keeping a close eye on the European Central Bank, which delivers its latest interest rate decision at 1245 GMT. Though the bank is expected to cut its benchmark interest rate again from the current 2.5 percent amid the increasingly grim economic data and a sharper than expected drop in inflation, the size of the reduction remains unclear.

If it delivers a half percentage point decrease and if president Jean-Claude Trichet hints at his post-meeting press conference that further cuts will be forthcoming then there may be a positive response in the markets, analysts said.

"The ECB may have the scope to deliver some cheer, especially if they can convince traders that their aggressive stance over rate cuts will be sustained as the prospect of even lower yields on cash could lend a degree of support to stocks," said Matt Buckland, a dealer at CMC Markets.

Sentiment remains low in the U.S. after Wednesday's 248.42 points fall to 8,200.14, its lowest close since Dec. 1. All 30 stocks that make up the Dow fell. The broader Standard & Poor's 500 index fell 29.17, or 3.4 percent, to 842.62.

Dow futures were 29 points, or 0.4 percent, lower at 8,130 while S&P500 futures fell 3.4 points, or 0.4 percent, to 836.40.

Oil prices lost ground again, with light, sweet crude for February delivery off 63 cents at $36.65 a barrel.

Meanwhile, the dollar slipped 0.1 percent to 88.86 yen while the euro dropped 0.2 percent to $1.3154.

[Associated Press; By PAN PYLAS]

AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.