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Markets show weakness worldwide, await jobless figures

A man watches news on display boards at the Australian Stock market in Sydney, Australia, Thursday, Aug. 11, 2011. Asian markets headed sharply lower early Thursday over mounting concerns about the health of Europe's banks and France's debt rating.
By Zachary A. Goldfarb and Neil Irwin, The Washington Post

Asian markets fell again as European shares regained some ground early Thursday and traders awaited data that they hoped would show a brighter employment picture in the U.S.

Britain’s FTSE 100 rose 1.9 percent to 5,104 in early trade while Germany’s DAX was 2.3 percent higher at 5,745. The CAC-40 in Paris rose 2.4 percent to 3,077.

Major markets on both sides of the Atlantic declined by more than 4 percent Wednesday, with investors dumping financial stocks in particular amid signs that the debt crisis in the periphery of Europe is rapidly becoming a banking crisis at its core.

The Dow Jones industrial average fell 520 points, or 4.62 percent, to 10,720, while the Standard & Poor’s 500 dropped 52 points, or 4.42 percent, to 1,121. The declines erased the major gains made Tuesday and dashed hopes that the markets were starting to rebound from their recent lows.

With fears of a fresh financial crisis on the rise, President Barack Obama met with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner at the White House to review developments. A White House spokesman said that Obama is not overly concerned with day-to-day gyrations in the market and that he plans to meet with business executives to discuss the economy.

In France, President Nicolas Sarkozy raced back to Paris from his vacation on the Riviera for an emergency meeting of his economic advisers amid rumors in financial circles that the country could soon lose its top-notch credit rating if it is forced to bail out its banks.

On many global markets, trepidation about the health of Europe’s financial firms overtook concerns about the slow pace of the U.S. economic recovery and the stunning downgrade last week of the nation’s credit rating by Standard & Poor’s.

Asian markets wobbled throughout the day amid pessimism about the health of the world’s major economies. But the falls in Asia were muted compared with the rout on Wall Street on Wednesday.

Japan’s Nikkei 225 index slipped 0.6 percent to close at 8,981.94 as a strengthening yen, which reduces the value of export earnings, clobbered Japan’s crucial export sector.

Honda Motor Corp. and Nissan Motor Corp. each lost 3.5 percent. Consumer electronics giants also slid — Sony Corp. by 2.2 percent and Panasonic Corp. by 1.7 percent.

Hong Kong’s Hang Seng index stumbled 1.1 percent to 19,558.78. South Korea’s Kospi, vacillating in and out of negative territory, was up 0.6 percent to 1,817.44. Australia’s S&P/ASX 200 was up less than 0.1 percent at 4,203.50 after earlier dropping about 2 percent.

A few markets eked out gains including China’s Shanghai Composite Index.

Lee Kok Joo, head of research at Phillip Securities in Singapore, said investors were still reeling from the effects of the U.S. credit downgrade, poor economic outlook and fears of possible credit downgrades of AAA rated countries in Europe.

“Investors are keeping a portion of their holdings in cash and are waiting for a more opportune time to get into the market,” he said.

U.S. weekly jobless claims, due to be released Thursday in Washington, would be a key factor in determining market direction in the coming days, he said.

“That is a very important number for the week,” he said. “If that is disappointing, then that would cement investor fears that the employment situation in the U.S. is getting worse.”

Shares of all the major European banks – including Germany’s Deutsche Bank, France’s BNP Paribas and Britain’s Barclays – fell sharply in trading. Speculators, meanwhile, increased their bets that the firms could collapse, although the odds, as measured by the cost of insurance against a default, remained low.

The steepest decline was at the French firm Societe Generale, one of the world’s largest banks, with $1.6 trillion in assets. The bank was forced to issue a statement denying “all market rumors” about its solvency and announced that it had solid earnings in July and August.

The problem for banks in France and Germany is that they have loaned hundreds of billons of euros to the governments of Spain, Greece, Ireland, Italy and Portugal. These governments are now struggling to avoid defaulting on their obligations.

Although investors have been expressing concern for months about the exposure of French and German banks to the troubled debt of other European countries, this has turned to alarm only in recent days, fueled by a generalized anxiety about the world economy.

If major European banks were to suffer massive losses, that could ripple across the global financial system. Although U.S. banks have limited direct exposure to European government debt, they do extensive business with European financial firms.

“A default or even a serious decline in the value of Italian and Spanish bonds would leave most of the French and German banking systems technically insolvent,” said Robert Shapiro, chairman of Sonecon, an economic consulting firm. “This is a very serious problem. You have a full-on global financial crisis if one of the major European banks goes down.”

On Wednesday, European banks borrowed about $70 billion from the European Central Bank, an unusually large sum, giving themselves more cash at a time that private lending between banks is showing new strains.

The rate that banks charge to lend dollars to each other for three months, known as the London Interbank Offered Rate, or Libor, rose to a four-month high of 0.28 percent Wednesday, a sign of heightened concern.

France, which had long been considered safe from Europe’s debt crisis, has faced speculation this week that it could lose its AAA credit rating if the government is forced to spend billions of euros to rescue its banks. France is coming under increased scrutiny by investors because, like the United States, it has a large and growing national debt, caused in part by underfunded social programs for retirees.

After Sarkozy met with his economic advisers, he called for new measures to cut government spending and tax loopholes to reduce the government’s budget deficit. He also declared that “pledges will be kept, whatever the evolution of the economic system.”

France received a boost when the major credit rating firms reaffirmed the country’s AAA rating.

The prognosis for Europe worsened this week because of new indicators showing that the German economy, which has been the continent’s leading engine, could be slowing amid a downturn in Germany’s exports.

The steep market losses occurred even though financial policymakers have had some success in containing the crises in Spain and Italy, the fourth- and fifth-largest economies in Europe, respectively.

Over the weekend, the European Central Bank announced that it would start buying Italian and Spanish bonds in an effort to keep the cost those countries pay to borrow from rocketing to prohibitive levels. Investors continued to respond favorably Wednesday as the yields on those bonds declined for the third straight day.

In the United States, large banks, such as Bank of America and Citigroup, came under pressure, declining by more than 10 percent in trading.

U.S. stock markets have been dropping for most of the the past two weeks. They took a severe hit Monday, falling the most since the 2008 financial crisis. Markets bounced back Tuesday before giving up those gains – and more – Wednesday. The Dow is down 20 percent from its recent high, while the S&P is down more than 18 percent.

Between July 22 and Monday, about $3 trillion in U.S. market value and $8 trillion globally has been eliminated, according to data compiled by Bloomberg.

Money again gushed into U.S. Treasury bonds, which investors consider safe. The price that the U.S. government must pay to borrow money for a decade fell for the third straight day, down 0.14 percentage point, to 2.1 percent. Just two weeks ago, the same interest rate was 3 percent.

The Associated Press contributed to this story.




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