Stocks fall on grim global economic outlook

The Dow Jones Industrial Average lost 3.5 per cent by the close of trade on Thursday [Reuters]

A grim economic outlook from the US Federal Reserve, warnings from the International Monetary Fund about global economic health and signs of slowing growth in China and Germany have pushed world stocks sharply down.

US stocks closed down 3.5 per cent (391.01 points) and European shares fell to a two-year low, dragging an index of global equities to a one-year bottom out.

Heads of the IMF and World Bank on Thursday warned that Europe and the US needed to get control of their deteriorating economic crises or risk “suffocating” the global economy.

Opening the annual meetings of the two key global lenders, they also warned poorer countries to get their houses in order to be able to endure the fallout from the advanced-economy crises.

The comments came after the Federal Reserve warned that the US economy faced “significant downside risks”.

“Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world … Not to do so is irresponsible,” World Bank president Robert Zoellick said.

“Some developed country officials sound like their woes are just their business. Not so,” he added.

IMF warnings

The primary problem dragging down global growth, the managing director of the International Monetary Fund, Christine Lagarde said, is the heavy government and household debts and capital-weak banks in the advanced economies.

This all “could actually suffocate the recovery,” she said. To get past the crisis of massive debt and deficits, Lagarde said that advanced countries needed to prioritise balancing their budgets.

“Time is of the essence, not just for the United States but for all advanced economies.”

The US dollar climbed to a seven-month high against an array of major currencies as investors on Thursday dumped riskier trades in favour of the world’s most liquid currency.

The eurozone crisis is one of many factors which has caused uncertainty in the global stock markets [Reuters]

The sharp rally in the dollar pushed down US crude oil prices by more than five per cent, while gold fell nearly $50 an ounce in a broad retreat in the commodities sector.

“Hidden behind the Greek drama over the past few weeks and unveiled again yesterday with the [Fed] statement and action, the unfolding global economic slowdown is back to front and centre,” Peter Boockvar, equity strategist at Miller Tabakan Company in New York, said.

The Dow Jones industrial average fell by as much as 527 points, before paring losses to close at 10,733.83. The Standard & Poor’s 500 Index dropped 37.18 points, or 3.2 per cent, at 1,129.58. The Nasdaq Composite Index slid 82.52 points, or 3.3 per cent.

World stocks as measured by the MSCI All Country World Investable Market index were down 4.12 per cent. The more volatile MSCI emerging markets stock index slid 7.02 per cent.

In Europe, Britain’s FTSE 100 lost 4.64 per cent, the German DAX lost 4.96 per cent and the French CAC shed 5.25 per cent.

The Federal Reserve warned on Wednesday of significant risks to the already weak US economy as it launched a plan, dubbed Operation Twist, to lower long-term borrowing costs and bolster the battered housing market.

“It seems the market doesn’t believe Operation Twist is enough to kick-start the spluttering economy,” said Ben Potter, market strategist at IG Markets. “A very downbeat outlook … seems to have unsettled markets even further.”

‘No clarity’

Asian stocks led the trend by falling sharply on Thursday amid warnings of serious downside risks amid the eurozone debt crisis.

The Tokyo stock exchange closed down 2.07 per cent on Thursday. The benchmark Nikkei 225 index fell 180.90 points to close at 8,560.26, while the Topix index of all first-section issues lost 12.59 points or 1.66 per cent to 744.54.

The markets in Sydney fell 2.63 per cent, or 106.9 points, to 3,964.9 – its lowest in more than two years.

Hong Kong fell 3.74 per cent in the afternoon and Shanghai was 1.76 per cent off, as uncertainty over the global markets had spread across Asia.

Seijiro Takeshita, director of the securities and investment firm Mizuho International, told Al Jazeera that the “markets have looked at the negativity” in world markets.

The eurozone crisis is one of many factors which has caused uncertainty because ”there is no clarity of what is happening with eurozone,” Takeshita said.