Global economy woes shake markets

Japanese shares felt the force of the economic uncertainty

Fears about a global economic slowdown, heightened by worsening US job figures, have continued to undermine stock markets around the world.

London’s FTSE 100 index lost 2.3% – taking its weekly decline to 7% – its biggest since July 2002.

Markets in Paris and Frankfurt fell by 2.5% as economy concerns spread.

On Wall Street the Dow Jones index clawed back early losses to edge higher despite figures showing the US economy shed 84,000 jobs last month.

But the benchmark US index still had its worst week since May.

Earlier, Japan’s main share index fell nearly 3% while markets in Hong Kong, China, Australia and India all slid 2%.

‘Ugly’ data

The US labor market figures – which showed the unemployment rate rising to 6.1% – were a further jolt to investors who have had to swallow a slew of poor economic data in recent days.

Economists had been expecting 75,000 jobs to be lost while the government also revised upwards.

“This was an ugly number that pretty much confirms that our economy continues to trend downward,” said Jack Ablin, chief investment officer of Harris Private Bank.

“This just knocks the legs out of any hope of seeing much economic improvement right now.”

‘Uncertainty’

Amid the uncertainty, few investors are willing to buy Masayuki Otani, Securities Japan

The FTSE 100 closed down 2.3% at 5,240.70 points. The last time it lost so much value in a week was more than six years ago in the wake of financial scandals such as Enron and WorldCom.

Markets in Paris and Frankfurt continued their recent downward trend, both the Cac-40 index and the Dax-30 dropping about 2.5%.

The Dow Jones index, which lost 3% on Thursday, rose 32.73 points, or 0.3% to 11,220.96, but still ended down 2.8% on the week.

“Given the fact we were down so much yesterday we’re seeing a bit of a reflex rally with investors wanting to take advantages of some of the bargains,” said Bucky Hellwig, senior vice president at Morgan Asset Management.

The Nasdaq index slipped 3.16 points, or 0.1% to 2,255.88, ending the week 4.7% lower.

Earlier Japan’s benchmark Nikkei index fell 361.54 points to 12,196.12 amid a widespread sell-off of shares in Asia.

The Hang Seng index fell more than 3% in Hong Kong while markets also fell sharply in China, Australia and India.

“Amid the uncertainty, few investors are willing to buy,” said Masayuki, Otani, chief market analyst at Securities Japan.

“Several bad things happened at once,” he added, explaining the fall.

Gloom

Worries about inflation have prevented central banks in Europe from cutting interest rates to help forestall a slowdown.

But analysts believe this could change soon with economic forecasts across Europe looking increasingly gloomy.

The European Central Bank cut its 2009 growth forecast from 1.5% to 1.2% on Thursday while the UK economy stalled in the second quarter.

In a separate development, the Russian rouble fell against the dollar a day after Russia’s central bank intervened to support the currency amid concerns about a flight of foreign capital after the conflict with Georgia.

The central bank sold up to $4bn in reserves, the Financial Times reported, after the rouble slipped to its lowest level since February 2007.

Sterling losses gather momentum

The pound has fallen further against the dollar, hitting its lowest level in almost two years amid fears the UK will fall into recession.

Sterling touched its lowest level since October 2006 at $1.8617 but later edged up to trade at $1.8691.

Measured against a basket of trade-weighted currencies, the pound is now at its weakest level since 1996.

The pound dropped sharply on Wednesday after the Bank of England issued a gloomy assessment of the UK economy.

The fall in sterling will hurt holidaymakers who have benefitted from a strong pound when traveling overseas- and make it more expensive for people to buy second homes abroad.

However, it could help exporters whose goods will be cheaper overseas.

The Bank’s governor Mervyn King said economic growth would be flat for the next year or so and that inflation would rise to 5% or above before falling.

But with domestic demand weak, a revival of exports could help the economy and limit job losses.

Rate cuts

Economists had thought inflation would prevent the Bank of England from cutting rates, but the Bank’s suggestion that inflation will begin to ease raised expectations of interest rate cuts and this hit the pound.

We have long argued that sterling has been significantly overvalued in recent years Jonathan Loynes, Capital Economics

Lower interest rates mean investors get lower returns on sterling deposits, which makes the pound less attractive.

Simon Derrick, currency strategist at Bank of New York Mellon, described the pound’s fall this week a “dramatic collapse” that recalled the aftermath of sterling’s ejection from European Exchange Rate Mechanism (ERM) in 1992.

However, he said the currency’s slide should begin to ease.

“Even within the most ferocious sterling downtrends in the past, significant corrections emerged in the middle of the moves,” he said.

But Jonathan Loynes, chief European economist at Capital Economics, thinks the pound could fall as far as $1.65 by the end of 2009.

“We have long argued that sterling has been significantly overvalued in recent years,” he said.

Deteriorating outlooks

Recent official figures have already shown the UK is struggling with high inflation and faltering growth.

Fears about European growth have also helped the dollar bounce back from record lows.

The US economy is still reeling from the credit crisis but analysts say the deteriorating outlook elsewhere in the world has given the dollar a boost.

Falling commodity prices have also supported the US currency. Investors had bought gold and oil to protect against dollar weakness and are now unwinding their positions.

The euro was trading at $1.4816 on Thursday, almost at the six-month low of $1.4815 struck this week. Earlier this year, the euro was trading at $1.60.

The euro has been further undermined by the military conflict in Georgia.