Chinese slowdown fears weigh on world markets

[August 10, 2010]  LONDON (AP) -- World markets fell Tuesday amid signs China's economy is losing steam and ahead of a Federal Reserve meeting that will be watched closely for rate-setters' views on the slowdown in the U.S. recovery.

In Europe, the FTSE 100 index of leading British was down 21.63 points, or 0.4 percent, at 5,388.89 while Germany's DAX fell 64.56 points, or 1 percent, at 6,287.04. The CAC-40 in France was 31.32 points, or 0.8 percent, lower at 3,746.05.

Wall Street was also set to open lower following modest gains on Monday -- Dow futures were down 65 points, or 0.6 percent, at 10,601 while the broader Standard & Poor's 500 index fell 7.6 points, or 0.7 percent, at 1,118.

Earlier, Chinese stocks led the retreat in Asia after trade figures showed a big drop in the growth rate for imports -- they rose by 22.7 percent in the year to July against 34.1 percent in the year to June and expectations for an increase of 30 percent.

The figures are a further indication that the rapid expansion in the world's No. 3 economy is grinding to a halt and Shanghai's benchmark index ended 77.26 points, or 2.9 percent, lower at 2,695.27 as a result.

The worry is that China will not be able to take up the slack if the U.S. economic recovery continues to slow. Chinese demand has been one of the reasons why the global economy recovered from recession, but China's monetary authorities worry about potential inflationary pressures in the economy and are putting the brakes on, particularly in the property market.

"China's cyclical story is turning from boom to bust, with negative implications for the rest of the world," said Diana Choyleva, an economist at Lombard Street Research. "Beijing engineered an impressive recovery which provided a substantial growth impetus to the rest of the world in the wake of the financial crisis."

In the U.S., a run of worse than expected economic data, culminating in a poor jobs report for July, has ratcheted up expectations that the Fed will have to turn on the monetary taps once again to get the recovery going again.

Most economists think the Fed will hold fire later but will indicate in its statement that the U.S. economy has lost momentum over the coming months at a time when inflationary pressures are easing.

"We believe that the Fed might be nervous that such a move would be over-interpreted as a sign of deep concern about the health of the economy, with adverse implications for economic and market confidence," said Daragh Maher, an analyst at Credit Agricole. "Instead, they are likely to leave policy unchanged ... and merely indicate a willingness to act as dictated by the data."

The dollar has clawed back some ground against the euro ahead of the Fed policy statement, which is due at 1815 GMT. By mid morning London time, the euro was down 0.5 percent at $1.3156.

Michael Hewson, an analyst at CMC Markets, said currency traders will be particularly interested to see if Fed rate-setter Thomas Hoenig changes his stance and cools his hawkish stance.

"If he does change camps this could well undermine the dollar further," Hewson said.

One of the reasons why the dollar has weakened over recent weeks is the seeming divergence between the policy positions of the Fed and the European Central Bank. While the Fed is facing some pressure to announce new policy measures, the ECB is seemingly better positioned to continue withdrawing emergency programs introduced during the recession and the government debt crisis.

In Asia, the strong yen continued to hurt shares of Japanese exporters, with the Nikkei 225 stock average closing down 21.44, or 0.2 percent, at 9,551.05.

By midmorning London time, the dollar was down 0.2 percent at 85.77 yen.

The yen's rapid appreciation is clearly beginning to cause concern in Japan. Finance chief Yoshihiko Noda has warned that the monetary authorities in Tokyo are watching developments in the foreign exchange markets closely -- that's a hint that something may be done to stem the export-sapping appreciation in the yen.

Elsewhere South Korea's Kospi shed 0.5 percent to 1,781.13, Australia's S&P/ASX 200 dropped 1.2 percent to 4,540.70 and Hong Kong's Hang Seng retreated 1.5 percent to 21,473.60.

Benchmark crude for September delivery was down 98 cents at $80.50 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 78 cents to settle at $81.48 on Monday.

[Associated Press; By PAN PYLAS]

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