Financial Fallout: The stock market rout that has wiped trillions of dollars off the value of shares around the world worsened yesterday as prices plunged again.
UAE stocks climb but Europe hit hard and US has big early losses
The stock-market rout that has wiped trillions of dollars off the value of shares around the world worsened yesterday as prices plunged again.
European shares ended the day sharply lower, with the UK's FTSE 100 down 3 per cent and Germany's DAX down more than 4 per cent. France's CAC 40 index also plummeted as shares of Societe Generale, the country's second-largest bank, dropped by as much as 20 per cent on fears of a sovereign downgrade.
The Dow Jones Industrial Average, an index of large US stocks, had risen by almost 5 per cent on Tuesday after the US Federal Reserve said it would keep interest rates at near zero until at least 2013. But the index was back down by 3 per cent in early trading yesterday. UAE stocks climbed, however, with Abu Dhabi's index ending about 1 per cent higher and Dubai's gaining 1.15 per cent.
"I think the market is very moody right now and will react positively and negatively in a very exaggerated way based on headlines," said Fadi Al Said, the head of equities at ING Investment Management Middle East.
Yesterday's turmoil followed a global market slide that Citigroup analysts called "nothing short of brutal" in a report on Tuesday. The drop "has been the third sharpest pullback in global stock markets since 1965", the report said, rivalling only the post-Lehman chaos in 2008 and the market collapse in 1987.
Even after Tuesday's gains, the Dow is down by 11.7 per cent since July 22. The UAE's markets have fallen in concert with global markets, albeit less dramatically. The Dubai Financial Market index is down 5.2 per cent since August 2.
The slide was caused by a cascade of bad economic news and fears of a double-dip recession in the US and Europe.
The trouble started late last month, when US leaders were locked in debate over raising the country's US$14.3 trillion (Dh52.52tn) debt ceiling ahead of an August 2 deadline. Treasury department officials warned the US would default on its financial obligations if Congress did not raise the legal borrowing limit by that time.
Uncertainty reigned, however, even after Barack Obama, the US president, signed a compromise bill that raised the ceiling by at least $2.1tn and cut spending by even more than that. Data showing declines in consumer spending and slowing manufacturing activity compounded worry about the world's largest economy.
The turmoil culminated on Friday when Standard & Poor's, one of the world's biggest credit ratings agencies, downgraded the US to "AA-plus" from its highest "AAA" rating. Markets responded by going into a tailspin.
Across the Atlantic, fresh concern cropped up over the state of Italy and Spain's government finances, raising the possibility that two of Europe's biggest economies would need aid.
That news spooked already skittish investors. The reactivation of a European Central Bank bond-buying programme aimed at supporting the debt of struggling countries did little to calm markets.
Investors, meanwhile, are still buying assets perceived as safe.
US treasury yields hit historic lows yesterday after investors piled into the country's debt despite the recent downgrading. Gold prices are also flirting with all-time highs.
The metal traded at $1,775 an ounce yesterday.
John Higgins, the senior markets economist at Capital Economics in London, said markets stood to tumble much further if recession did take hold again, although that was an unlikely scenario.
"The onset of recession would probably see the stock market fall much more sharply," he said. "There have been 14 'official' recessions in the US since and including the Great Depression of the 1930s. On average, equity prices have fallen 39 per cent from peak to trough around these economic downturns."