World markets hit by Fed's US growth warning

[May 21, 2009]  LONDON (AP) -- Global stock markets fell sharply Thursday as investor hopes of a quick economic rebound were diminished by a warning from the U.S. Federal Reserve that the U.S. economy, the world's largest, was likely to shrink by more than anticipated this year.

Germany's DAX was down 76.80 points, or 1.5 percent, at 4,962.14 while France's CAC-40 fell 44.40 points, or 1.3 percent, at 3,258.97. The FTSE 100 index of leading British shares slumped 96.77 points, or 2.2 percent, to 4,371.64.

Earlier, the major Asian markets like Tokyo and Hong Kong lost about 1 percent or more.

Investor concerns were stoked by the warning Wednesday from the Fed that the U.S. economy was likely to contract by between 1.3 and 2 percent compared with the earlier estimates of 0.5 and 1.3 percent, according minutes of the Fed's rate-setting panel. And the Fed's policymakers also said the unemployment rate could approach 10 percent.

"Minutes of the last meeting painted a downbeat outlook for global economies and the financial sector, suggesting that any feelings among traders that the worst was behind us could prove premature," said David Jones, chief market strategist at IG Index.

The Fed's warning hit Wall Street Wednesday and the selling pressure was expected to continue at the open later. Dow futures were down 39 points, or 0.5 percent, at 8,356 while the broader Standard & Poor's 500 futures dropped 4.8 points, or 0.5 percent, to 895.10.

Adding to the gloom, in London at least, was a warning from credit ratings agency Standard & Poor's that Britain may have its rating cut because of rising debt levels.

Though the ratings agency reaffirmed the country's actual ratings, it lowered its outlook to "negative" from "stable" because of massive borrowing to deal with the recession and the banking crisis.

"Not surprisingly this is doing sentiment no favors," said IG Index's Jones.

"This combination of news over the last 24 hours has resulted in a predictable knee-jerk sell-off -- the question from here is whether it is the start of a more sustained slide to correct the impressive gains seen since mid March," he said.

The trigger for the gains over the last couple of months has been some better than expected economic news around the world, particularly from the U.S -- the S&P 500 index in the U.S. has risen around 35 percent from its lows.

However, fairly downbeat U.S. retail sales data last week reined in some of the hopes of the more optimistic members of the investing community and stocks have since generally traded sideways.

Analysts said it has been noticeable that any corrections seen since the rally began in mid-March have been relatively mild, suggesting that there are still enough investors out there willing to buy into dips.

Earlier, Japan's Nikkei 225 stock average lost fell 80.49 points, or 0.9 percent, to 9,264.15, and Hong Kong's Hang Seng shed 276.35 points, or 1.6 percent, to 17,199.49.

Elsewhere, South Korea's Kospi dropped 1 percent to 1,421.65. Shanghai's index fell 1.5 percent while Australia's was off 0.3 percent.

Oil prices eased off six-month highs, with benchmark crude for July delivery down $1.21 to $61.31 a barrel. On Wednesday, the July contract rose $1.94 to settle at $62.04 after the government said U.S. crude inventories fell for a second week, suggesting demand may be improving.

The dollar rose modestly to 94.68 from 94.58. The euro was higher at $1.3792 from $1.3783.

[Associated Press; By PAN PYLAS]

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

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