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World stocks lower on recession fears

October 21, 2008 10:29:06 AM PDT
World stock markets were mostly lower Tuesday on renewed fears about the U.S. economy after a number of high-profile U.S. companies warned of trouble ahead. The Dow Jones index of leading U.S. shares was 234.08 points, or 2.5 percent, down at 9,031.35 by early afternoon New York time. Its decline pushed Europe's lower, with the FTSE 100 index of leading British shares closing down 52.94 points, or 1.2 percent, at 4,229.73. Germany's DAX was down 50.60 points, or 1.1 percent, at 4,784.41.

France's CAC-40 index of leading shares remained in positive territory, buoyed by the French government's decision to inject euro10.5 billion ($14 billion) into the country's six largest banks by year-end to help counter the effects of the global financial crisis.

Though down from earlier, the CAC closed 26.89 points higher, or 0.8 percent, at 3,475.40, with banks in demand. BNP Paribas SA was up 6.9 percent, Societe Generale SA 10.2 percent and Credit Agricole SA 11.3 percent.

The latest concerns about the state of the U.S. economy emerged when companies like chemical manufacturer DuPont Co., Caterpillar Inc., the world's largest maker of construction and mining equipment and defense contractor Lockheed Martin downplayed their prospects.

Dupont reported sharply lower third quarter earnings and trimmed its full-year forecast, while Caterpillar noted "recessionary conditions" in North America and forecast flat sales for 2009.

Lockhead Martin, which makes F-35 fighter jets, reduced its guidance for next year too.

"The lackluster performance of the U.S. equity market simply goes to show that investors concerns have shifted from a meltdown in the financial sector to the rapid deterioration in the real economy," said John Higgins at Capital Economics.

Despite Tuesday's modest declines, stock markets are showing a bit more resilience and that's mainly due to the fall in interbank lending rates, which should presage more stable conditions across all the financial markets.

Figures released Tuesday show that lending rates between banks in the U.S. and Europe have dropped to the lowest levels in over a month. The rate on three-month loans in dollars slumped 0.23 percentage points to 3.83 percent. The so-called European Interbank Offered Rate for three-month euro-denominated loans has fallen 0.03 percentage points to 4.968 percent. That is the first time the euro rate has dipped below 5.00 percent since Sept. 18, when it shot higher after Lehman Brothers collapsed.

Abnormally high interbank lending rates have been the catalyst for the crisis in the financial markets over recent weeks, raising fears they would choke off credit to businesses and individuals.

With Libor rates declining, the focus of attention has shifted from the banking crisis to economic fundamentals around the world.

In Britain, for example, figures earlier showed gloom in the manufacturing sector at its lowest level since 1980. The Confederation of British Industry revealed that its quarterly business optimism balance slumped from minus 40 in June to minus 60.

As a result, there is growing talk that policymakers in Britain will have to act fast to support the real economy. The government has spoken of further loosening the purse strings, while the Bank of England may be forced to cut interest rates aggressively. All ears will be on Bank of England governor Mervyn King later when he delivers one of his three key speeches of the year.

"We see policy rates being lowered to 2.50 percent (from the current 4.50 percent) by the middle of next year, with the chances of another 0.50 percent move at the November meeting to coincide with the Bank's forecast revisions rising by the day," said George Buckley, chief UK economist at Deutsche Bank.

The Bank of England and other central banks are expected to follow the Bank of Canada's lead, which earlier Tuesday cut its key interest rate by a quarter-point to help ward off the effects of a U.S.-led recession.

In Asia earlier, Japan's Nikkei rose 300.66 points, or 3.34 percent, to close at 9,306.25, marking the third consecutive day of gains.

While shares in most other countries moved higher, several key stock measures sold off early gains to close in the red. Hong Kong's Hang Seng Index lost 1.84 percent, Shanghai's benchmark fell 0.8 percent and South Korea's index shed about 1 percent.

Hong Kong's benchmark was dragged down after conglomerate Citic Pacific Ltd. warned that it could faces losses of more than HK$15.5 billion (nearly $2 billion) after a top executive made unauthorized bets against the U.S. dollar.

In Australia, the main index gained 3.9 percent after the country's central bank chief said he believed coordinated global action to tackle the financial crisis had helped to avert a worldwide catastrophe. Resource giant Rio Tinto helped lead the way, soaring more than 12 percent.

Fears about the state of the world economy pushed crude oil prices down $3.25 to $71.00 a barrel Tuesday despite expectations that OPEC will try to halt a three-month slide in prices by cutting production quotas at least 1 million barrels a day.

The dollar fell 1.1 percent against the yen to 100.67 yen. The euro weakened 1.5 percent to $1.3147.


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