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Stocks tumble worldwide on fears of U.S. recession
Volatile day forecast for Wall Street traders
By William Sluis
Tribune reporter
11:49 PM CST, January 21, 2008
A sell-off in global stock markets on a day when Wall Street was taking a respite, celebrating Martin Luther King Jr. Day, sent a chill through investors anticipating that Tuesday may bring a chaotic start to trading when U.S. markets reopen.
In a grim portent, futures on the Dow Jones industrial average were off by as much as 500 points. The Dow has fallen by more than 2,000 points, or about 14 percent, from its peak reached in October.
"We could have a messy opening," said Chicago economist Carl Tannenbaum, who said the wave of overseas pessimism seen Monday is hard to explain. "Much of the blame was placed on recession fears, but those fears have been expressed many times in recent weeks."
There was no particular trigger to Monday's huge sell-off, he said. But other analysts said the biggest factor is a new wave of pessimism about the global banking sector.
While others were eager to blame a $145 billion tax-stimulus plan offered by President Bush late last week, Tannenbaum said, "It's easy to take a negative view of the proposal, but many people have been positive about it."
The downbeat mood began in Asia and spread to Europe, leaving no major market unscathed.
In many cases, the sell-offs were stunning. Britain's benchmark FTSE-100 slumped 5.5 percent; France's CAC-40 index tumbled 6.8 percent; and Germany's blue-chip DAX 30 plunged 7.2 percent.
In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent, its biggest percentage drop since the Sept. 11, 2001, terror attacks.
"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus package is too little, too late, and investors feel it won't help the economy recover."
Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange losing 4.7 percent. In Brazil, stocks plunged 6.6 percent on Sao Paulo's Bovespa exchange.
Stocks lost value in 42 of the 43 nations with widely followed markets; the only exception was Sri Lanka.
The losses continued early Tuesday in Asia. Japan's Nikkei 225 average was down 4.4 percent in the morning session, and the Hang Seng was off 5 percent.
Economist Brian Wesbury said part of the problem Monday stemmed from a major downgrade of a firm that insures municipal debts. When such debt is marked lower, banks are forced to write it down against their capital.
"This affects the ability of banks to lend, and it helped to create an overreaction among investors overseas," said Wesbury, of First Trust Advisors in Lisle.
"There is an incredible amount of fear in the world," he added, even though most economies remain robust. The fears are based in part, Wesbury said, on worries that so-called derivative instruments could default.
Derivatives are contracts and options traded on interest rates, currencies and debts. At stake are trillions of dollars in assets.
Wesbury said he believes such fears are overblown, but they have become widespread. American consumers have continued to spend at a moderate rate of growth, he said, and the job market remains strong.
Comments about the possibility of a recession by President Bush and Federal Reserve Chairman Ben Bernanke, he said, "may have helped to incite anxiety, even though we have a very sturdy and resilient economy."
Their comments were intended to soothe global fears but may not have succeeded, Wesbury said.
'Blood on the wall'
All market watchers could do was survey the damage.
"It was all about blood on the wall," said Georges Ugeux, chairman of Galileo Global Advisors, who was visiting the Indian stock exchange, which fell by the equivalent of a 900-point drop in the Dow average. "For them, this is a black Monday."
Analysts said fears about debts are driven by massive losses on loans made to U.S. home buyers. These potentially could cascade through the world financial system.
For example, the Bank of China is now forecast to record a multibillion-dollar loss on U.S. mortgage investments. The bank may write down $2.4 billion for the fourth quarter of 2007 and an equal amount for this year, wrote Dorris Chen, a Shanghai-based analyst at BNP Paribas.
"Bank of China is in a worse situation than expected," said Zheng Tuo, who manages the equivalent of $790 million at Bank of Communications Schroders Fund Management Co. in Shanghai. "Investors are worried the woe will spill over to the whole banking sector."
Analysts said this year's opening on Wall Street has been the worst since the late 1970s.
On Monday, "there was also a problem with another German bank, WestLB, which said it would report a loss of $1.4 billion in 2007 because of its exposure to deteriorating mortgage assets. Other German banks are also reporting worse than expected results," said investment manager Peter Cohan, based in Marlborough, Mass..
"If today's futures are any indication, the Dow Jones industrial average will lose 520 points, or more than 4 percent, when it opens Tuesday morning," he added.
Consumer confidence has been slipping in many European countries as inflation has begun making a comeback in recent months.
Dollar gains
While stocks in the United States may see a rocky opening on Tuesday, "they could steady before the end of the day," Tannenbaum said. "Our markets often act as a firebreak against heavy selling in other parts of the world."
Indeed, the dollar gained Monday against the euro, as oil prices and gold fell on the fears of a global slowdown.
Wesbury said the losses in the Dow Jones industrials since October are about equal to the setback suffered during a single day in the widely trumpeted Black Monday crash of 1987.
"Even though everyone thought we would see a recession in 1987, it just didn't happen," he said.
Over the following year, stock prices recovered rapidly, and the economy kept growing.
wsluis@tribune.com
Copyright ? 2008, Chicago Tribune
