22 Oct 2008

Markets, currencies tumble on recession fears

10:04 pm on 22 October 2008

Fears that the global economy is hurtling towards recession sparked fresh turmoil on world markets on Wednesday, with sharp falls in Asian stocks and currencies tumbling.

Governments around the world have now promised nearly $US4 trillion to guarantee bank deposits and bank-to-bank lending, and in many cases have taken stakes in struggling banks.

But overshadowing the progress made in fighting financial collapse are widespread worries about the deteriorating global economic climate.

Although there has been a gradual improvement in the global credit situation, traders on Wednesday were focusing more on a worsening outllook for company profits in the United States and Asia.

Wall Street's Dow Jones index sank 2.5% on Tuesday after several American companies posted weaker-than-expected quarterly earnings.

Share prices in Japan's big banks were especially hit on Wednesday and a rising yen added to concerns about the country's manufacturers, who are made less competitive by the currency's strength.

The market was spooked by media reports that auto giant Toyota Motor and megabank Mitsubishi UFJ are likely to suffer sharp falls in earnings.

Japan's Nikkei share index sank 6.79% by the close, ending a three-day rebound, while stocks dropped 5.1% in Seoul to finish at their lowest level for three years. In Australia, the benchmark index was 3.4% lower and the New Zealand market was 1.7% down.

The turmoil spilled over into high-yield currency markets. The euro hit a near two-year low against the US dollar and the British pound plunged to a five-year low on speculation of further European interest rate cuts to spur economic growth.

In Britain, the governor of the Bank of England, Mervyn King, warned that the economy is probably entering a recession.

Governments committed

Governments around the world showed continued willingness to act to protect their financial systems.

Australia and New Zealand were forced to tweak their plans to guarantee bank deposits on Wednesday after media warned the moves had caused financial dislocation by prompting a rush of money from uncovered schemes into the back-stopped deposits.

Argentina on Tuesday took over the $US30 billion private pension system to guarantee pensions at a time of global market turmoil.

The US Federal Reserve on Tuesday unveiled Washington's latest step to end the crisis, saying it could lend up to $US540 billion to buy certificates of deposit and commercial paper from money market funds, which have struggled to cope with a wave of withdrawals by investors.

The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks as the global financial crisis worsened.

But while credit markets have showed signs of a thaw recently, analysts warned that companies will still find it harder to gain access to credit, while the outlook for their profits is also growing bleaker.

Nomura equity strategist Sean Darby said consumer spending in the major economies was being hit by falling asset prices and rising unemployment.

"We expect a hard landing for the global economy," he warned.