Markets plunge on recession fears

Figures show that more Americans applied for unemployment benefits last week than the week prior [Reuters]

Stock markets around the world plunged as rising signs of a US recession, combined with renewed worries over the financial health of Europe’s banks, continued.

After a few days of relative calm in the markets, especially when compared to the huge volatility of the previous week, investors on Thursday pulled back their economic activity.

Negative economic reports, which culiminated in a grim manufacturing survey from the Federal Reserve Bank of Philadelphia, are believed to have spooked investors.

The survey’s main indicator of factory activity slid to a near two and a half year low of minus 30.7 in August from a positive 3.2 reading in July. Anything below zero indicates a contraction in activity.

“This was obviously a terrible report, and, if sustained, readings like these would be consistent with recession,” said Joshua Shapiro, chief US economist at MFR Inc.

The negative survey came in the wake of weekly jobless claims figures showing more Americans applied for unemployment benefits last week than a week earlier. Consumers also paid more for gas, food and clothes last month, pushing prices up to their highest levels since last spring.

Earlier, investor sentiment had been knocked by news from Japan that exports in July fell 3.3 per cent from a year earlier to $75.6bn as a result of the strong yen and the ongoing impact of the March 11 earthquake and tsunami.

British retail sales also disappointed in July and a rebound in August looks unlikely, analysts said, following a wave of riots around England.

With so much gloomy economic news, it’s unsurprising that stocks have been on the retreat all day.

International markets

Britain’s FTSE 100 dropped 4.5 per cent on Thursday, while Germany’s DAX fell 5.8 per cent. France’s CAC-40 ended the day with a 5.5 per cent loss.

Banks took a particular beating from fears over the global economic recovery combined with the prospect of a new tax on financial transactions and renewed concerns over Greece’s bailout. French bank Societe Generale and British bank Barclays led the way down, with double-digit percentage losses.

“Banking stocks have been decimated across Europe, with indiscriminate selling even in banks that maintain their exposure to the crisis is slim,” said Will Hedden, a sales trader at IG Index.

With investors’ appetite for risk so evidently low, it’s unsurprising that assets like gold and the Swiss franc were back in favor – both are considered safe haven assets for investors to park their cash.

By midday trading on Thursday, the US’ Dow Jones industrial average slid 3.34 per cent and Standard & Poor’s 500 index fell 3.9 per cent. The Nasdaq dropped 4.16 per cent.