World stocks hit by fears of debt crisis contagion

[February 05, 2010]  LONDON (AP) -- World stocks tumbled again Friday as investors worried that the debt crisis enveloping Greece may spread to other vulnerable countries in Europe such as Portugal, and amid fears that jobs data later will show that the U.S. recovery is weaker than expected.

In Europe, the FTSE 100 index of leading British shares was down 82.34 points, or 1.6 percent, at 5,056.97, while Germany's DAX fell 69.61 points, or 1.3 percent, to 5,463.63. The CAC-40 in France was 76.60 points, or 2.1 percent, lower at 3,612.65.

Once again, stock markets in Greece, Portugal and Spain led the retreat in Europe -- Greece's main composite index was down a further 3.5 percent, while Portugal's PSI 20 fell 3 percent and Spain's IBEX dropped 2.6 percent.

Earlier in Asia, stock markets responded to the massive falls recorded in the previous session in Europe and the U.S., where the Dow Jones industrial average slid 2.6 percent, its worst performance in nine months.

Japan's benchmark Nikkei 225 sank 2.9 percent, or 298.89 points, to 10,057.09, while China's Shanghai Composite Index fell 1.9 percent, or 55.91, to 2,939.40. Hong Kong's Hang Seng buckled 3.3 percent to 19,665.08.

"It's been a dismal 24 hours for global markets as stock markets, commodities and currencies have fallen around the world, while bond default risk has soared, as investors have fled risky assets into the relative safety of the dollar," said Michael Hewson, an analyst at CMC Markets.

The catalyst behind the escalating jitters gripping investors is the debt crisis in Greece and the fear that it might move on to other countries, such as Portugal, Spain and Ireland, with weak public finances.

The question is whether these governments can deliver the deficit cuts they have promised. The Greek plan, which has been cautiously backed by the European Commission and the European Central Bank, is to get the budget deficit down from around 12.7 percent of the country's gross domestic product in 2009 to below 3 percent in 2012.

But with strikes looming -- customs and tax officials have already begun a 48 hour strike in protest at the planned austerity measures -- investors remain skeptical at best.

As in the banking crisis of 2008, traders are looking at who may be next to suffer Greek-like budget difficulties and all eyes Friday will be on whether Portugal's minority government survives a showdown with opposition parties over its austerity plan.

"It has been a worry for Greece for weeks but it is now spreading like wildfire, driving equity markets lower, causing further concerns both about medium-term growth prospects and in currency markets," said Kit Juckes, chief economist at ECU Group.

All this is hitting the euro hard as investors think a bailout of the periphery countries is becoming more likely by the European Union.

The euro has fallen below $1.37 for the first time since May last year, and by midmorning London time was trading 0.4 percent lower on the day at $1.3670 -- while the euro has been undermined by concerns about its peripheral members, the dollar continued to attract support through its supposed safe haven status during times of risk aversion.

Commodity and energy prices have also been hit hard by the meltdown in risk assets -- benchmark crude for March delivery was down a further 24 cents at $72.90 a barrel in electronic trading on the New York Mercantile Exchange after losing $3.84 overnight, while gold fell $8.40 an ounce to $1,054.

It's not often on the first Friday of the month that the markets are not totally focused on the U.S. nonfarm payrolls data, which often set the stock market tone for a week or two.

Disappointing weekly U.S. jobless claims figures Thursday stoked fears that payrolls will actually fall in January, whereas the consensus in the markets is for a 10,000 improvement.

"Today's U.S. employment report now feels like a sideshow, except that the market will probably react more to a weak figure than a strong one," said ECU Group's Juckes.

"A further fall in employment will increase fear about the lack of job creation and the implications for budget deficits and for demand," said Juckes.

Investors were hesitant ahead of the U.S. open -- Dow futures were down 63 points, or 0.6 percent, at 9,916 while the broader Standard & Poor's 500 futures fell 8.5 points, or 0.8 percent, at 1,053.20.

The focus at this weekend's Group of Seven meeting of finance ministers and central bankers from the world's leading industrialized economies has suddenly become a point of interest in the markets -- with the G-20 now the world's main forum for economic cooperation, the G-7 was widely thought to be an anachronism.

Elsewhere in Asia, South Korea's Kospi slid 3.1 percent to 1,567.12, Taiwan's market dived 4.3 percent and Australia's S&P/ASX benchmark dropped 2.3 percent.

[Associated Press; By PAN PYLAS]

AP Business Writer Joe McDonald in Beijing contributed to this report.

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