Published: 02 March 2007
Fresh anxiety erupted about the health of the world's major economies yesterday after investors in stock markets across Asia, Europe and the United States once again staged significant retreats two days after Tuesday's unexpected global equity sell-off.
In New York, the Dow Jones Industrial Average plunged more than 200 points in the first minutes of trading, seeding fears of a repeat of Tuesday's massacre that saw a 416-point collapse on the index.
With slowdowns emerging, notably in the housing market and car manufacturing in the United States, signs are building that it economy may be at a pivot point, with some observers worrying about decelerating expansion and possibly a recession looming.
The fearful mood was exacerbated by comments from Alan Greenspan, the influential former chairman of the US Federal Reserve, about the possibility of the US entering recession before year's end. He told a conference in Tokyo yesterday: "By the end of the year, there is the possibility but not the probability of the US moving into recession." He has argued this week that corporate profit margins appear to be narrowing, indicating that a recent economic expansion has reached a "mature phase".
Market watchers warned of several more bumpy days to come, pointing to the renewed erosions in stock markets globally yesterday. The Shanghai stock market slippedan additional 2.9 per cent. The London FTSE index closed down 55.5 points or 1.5 per cent. The Dow later recouped most of its early losses as some more encouraging economic data was released and closed down 34.29 points. But fears remain that there may be worse to come. All the markets have fallen significantly during the course of the week.
Senator Hillary Clinton, a candidate for the US presidency, last night called events of recent days a "real wake-up call" for the United States, saying it was "increasingly losing control" of its economic sovereignty because of the globalisation of economies and policy-making, including in China.
"We are in a different environment," she said, noting the $2.2 trillion (£1.1trillion) foreign debt held by the US. "Obviously, the level of public debt that is held by central banks and foreign government is a problem and I don't want our government to ignore this wake-up call."
A degree of calm was restored to the New York market after indicators were released showing better-than-expected manufacturing numbers for the US. The Institute for Supply Management's index of manufacturing activity registered 52.3 for January, stronger than the 50.0 reading analysts had expected. By convention, a recession is considered to be in the offing if that number falls below the 50-point mark.
The US Commerce Department revealed that seasonally adjusted personal income in the US rose by 1.5 per cent in January, which was also a better result than had been anticipated.
Investors have been spooked by this week's gyrations after enjoying 12 months of almost unbroken growth in stocks. No one was more shocked than the new Chinese investors who watched in dismay on Tuesday as the Shanghai index tumbled almost 9 per cent.
US economists are contemplating a change in the balance of power between world markets, where New York can nowadays find itself hostage to foreign market performances.
"It's kind of the tail wagging the dog," said Arthur Hogan, chief market analyst at Jefferies & Co in New York. "There's no stability in Asian markets, and no stability in European markets. We're trading the market as the rest of the globe is."
After the "Shanghai Sneeze", as some called it, officials tried to soothe investors. There was a brief claw-back on Wednesday in New York after Mr Greenspan's successor at the Federal Reserve, Ben Bernanke, said in congressional testimony that "there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year". He played down a report that showed that a 2006 fourth-quarter expansion of the US economy was slower than previously estimated.
There was no saying how the week would end for world markets today. "The aftermath of Tuesday's major sell-off will linger for the next couple of days," said Peter Cardillo, chief market economist at brokerage house Avalon Partners. He added, however, that "fear of recession is overblown".
That Mr Greenspan is still able to move world markets even in retirement is certain to raise questions about whether he would do better to keep his counsel.
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