Wall Street continued its decline into a second day, as a combination of problems sent investors running for the US dollar and Treasuries.
The absence of a Eurozone solution, a still anaemic US economy and the prospect of a trade war between the US and China meant that risk appetite was in short supply.
By 3.45pm (London time), the Dow Jones had recovered from its lows, but was still down 1.2% at 10,784.72, while the S&P 500 had dropped 0.7% to 1091.22. Meanwhile in London, the FTSE 100, which had been down as much as 4% at one point, was 2.7% lower at 4938.19.
Markets have multiple reasons to worry
The Greek crisis sent US indices tumbling this afternoon, mirroring the moves seen in Asia and Europe, as indices spread betting investors continued to abandon risky assets in order to protect their wealth.
However, several other elements are at work. One is continued weakness in the US economy, as shown up by a drop in factory orders in August. Orders fell by 0.2% during the month, compared to a 2.4% gain in the previous month.
Fed chairman Ben Bernanke also reminded everyone about the continued lack of real recovery, noting that new data had shown that the recession had been deeper, and the recovery weaker, than previously thought.
Although he added that the Fed stood ready to undertake further action as needed, markets failed to get particularly excited, with memories of the disappointment from the last Fed meeting still fresh in everyone’s mind.
The other, and perhaps more troubling, element in today’s downward moves has been the prospect of a currency war between China and the US. In Washington, a bill is currently under discussion that will allow the US to impose duties on Chinese goods, making them more expensive.
The move is perceived by China as punishment for deliberately undervaluing its currency, with statements from Beijing warning of a trade war between the two powers. It also added, pointedly, that the move would not do anything to alleviate the problems in the US economy, such as a low level of savings, a large trade deficit and high unemployment.
The world economy has enough to cope with in the shape of the Eurozone farce and weaker economic growth. It does not need a major argument to develop between the two largest and most important economies.
Airline shares come back to earth
Shares in American Airlines nose-dived yesterday, on rumours that the airline was about to file for Chapter 11 bankruptcy protection, and the European airline sector has been hit hard as a result today.
In London, International Airlines (which covers British Airways and Iberia) fell 5.5% to 146p, while Germany’s Lufthansa dropped 4.6%.
However, the big loser was Air France KLM, as investors realised that the airline was carrying a dangerous combination of high leverage and high operational gearing. The shares fell 9% to €4.8, and a cash call from this embattled flag-carrier could be on its way fairly soon.
Mulberry gets hand-bagged
Mulberry, the upmarket fashion group, may have extended an Asian distribution deal today, but that has not stopped its shares falling 7% to 1295p. Mulberry, whose shares rocketed in 2010 and 2011, has been hit hard by fears about a ‘hard landing’ in China.
These worries were prompted by a note last Wednesday from Bank of America, which suggested growth in the country might slip below 7% (still a level of growth to make Western governments green with envy).
Mulberry has done very well out of China, along with its peer Burberry, but the shares are down 17% since last week as investors choose to take profits and await further developments.
Oil slides to a new low for the year
As global growth worries keep increasing, and supplies from Libya appear to be picking up as the conflict there winds down, oil has slumped to a one-year low.
Pessimism about the global economy is not hard to find, and Goldman Sachs has added to this with new predictions for a recession in France and Germany and continued weak growth in the US.
During the afternoon, US crude fell 2.2% to $75.97 per barrel, while Brent crude was down 2% at $99.66, breaking through the symbolic $100-per-barrel level.
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'Greek Crisis Send US Indices Spread Betting Markets Lower', Article by IG Index, last update: 4-Oct-11
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