Global markets in turmoil as recession fears spread
The worst share rout in more than two years has wiped $60 billion from the Australian market in a day and fuelled fears of a second global financial crisis.
The worst share rout in more than two years has wiped $60 billion from the Australian market in a day and fuelled fears of a second global financial crisis. THE worst share rout in more than two years has wiped $60 billion from the Australian market in a day and fuelled fears of a second global financial crisis.The plunge raised expectations the Reserve Bank could be forced to cut interest rates in order to prevent Australia sliding into recession.World markets last night continued to tumble, with London dropping almost 3 per cent on opening.Earlier, the Reserve revised down its forecast for economic growth this year by 1 percentage point to 3.25 per cent, blaming weak household spending and a slower-than-expected recovery in coal exports.Within minutes of opening, Australian stocks plunged more than 4 per cent. Oil and resources stocks led the fall - the biggest since February 2009.The sell-off followed the darkest day on Wall Street since the height of the global financial crisis. Markets across Asia - which remain the key to global growth - were also hammered with Japan's Nikkei closing down 3.7 per cent and Hong Kong down 4.29 per cent.''This is an example of clear-cut panic driving a flight to safety,'' said Peter Quinton, a director of research at Bell Potter Securities.The Australian dollar's reputation as a haven was buffeted as it slumped to a four-month low of $US1.04. More than US2.2? was sliced off the value of the dollar during the local session.Crude oil fell nearly 5.8 per cent, while a raft of industrial metal prices were also down around the world.Australian shares are now deep into a technical ''correction'', having lost more than 17 per cent from the peak in mid-April this year.These losses are likely to have wiped out last year's 8.9 per cent average gain in balanced superannuation funds, where the majority of Australians have their super invested.Traders yesterday tipped the Reserve to cut interest rates by 1.25 percentage points by April next year. Such a move would see official rates fall to 3.5 per cent.''Current market pricing for the Reserve Bank reflects the market factoring at least some potential for GFC Mark II,'' said Phil O'Donaghoe, a senior economist at Deutsche Bank.Treasurer Wayne Swan attempted to calm local investors by highlighting the differences between Australia and the stuttering economies of Europe and the US.''Australians should never forget that our economic credentials are among the strongest in the developed world and that Australia has a proven track record of dealing with global economic uncertainty,'' Mr Swan said.The Treasurer did concede the Australian economy was not ''immune'' from global events.Although silent on interest rates, the Reserve warned that a disorderly unravelling of the sovereign debt crises engulfing the US and Europe would have a ''disruptive'' effect on the world economy, further weakening Australia's recovery.Australia's ASX200 index clawed back from its session lows but ended yesterday down 171 points at 4105. This followed the Dow Jones industrial average finishing its Thursday session down 4.3 per cent, and heavy losses across Europe.German Chancellor Angela Merkel and French President Nicolas Sarkozy were last night interrupting their holidays for a phone conference on the euro-zone debt crisis.The global equity sell-down was sparked by a botched effort by the European Central Bank to quell jittery debt markets.The bank intervened with a show of support to buy bonds of some smaller countries, but not Italy and Spain, whose mounting troubles have come into the spotlight.This was quickly seen as a sign that European authorities did not have the financial firepower to absorb the large debt problems of the two countries.A wave of selling spread across the Atlantic, with investors worried the US was headed towards a double-dip recession. However, analysts said credit markets were still healthy and the US was stronger than a few years ago, so a repeat of the financial crisis was unlikely.Reena Aggarwal, professor of finance at Georgetown University, said: "There is a huge difference. During the financial crisis the banking sector broke down. Right now it's a crisis of confidence based on weak economies, but the banking sector is not broken.''A string of weak economic data has been released in the US in recent days. Employment figures, released early Saturday Melbourne time, will provide a key direction on the health of the US economy. Washington's reaction to the market's tumble was muted. ''Markets go up and down,'' said White House spokesman Jay Carney.Meanwhile, opposition treasury spokesman Joe Hockey enraged the government when he referred to debt-stricken Greece after being challenged on a claim that Australia's debt level was ''significant''. Although he clarified that Australia could pay its debt, Mr Hockey said the country's reliance on foreign funds was a key vulnerability.''Australia is a massive importer of money, and just as the financial crisis hit our banks last time, there is the capacity for similar events to hit us again,'' Mr Hockey said.Mr Swan accused Mr Hockey of recklessly trying to talk down the economy.'To compare Australia's finances to those of Greece not only defies logic, but is grossly irresponsible for someone who lays claim to high office,'' Mr Swan said.Australian government debt is 7.2 per cent of GDP - one-tenth the comparable level of other OECD nations.With NEW YORK TIMES