Offshore overnight
Stocks and interest rates tumbled overnight as investors around the world took a bleaker view of the US economy.
The Dow Jones industrial average fell 265 points, its biggest drop in six weeks, and all the major indices fell more than 2 per cent.
The yield on the Treasury's 10-year note fell to its lowest level since March 2009 as investors worried about the economyand avoiding stocks sought the safety of government securities.
Companies across a wide range of industries dropped.
Only 442 stocks rose on the New York Stock Exchange, while 2627 fell, a sign that investors expect all businesses to suffer if the economy continues to weaken.
Investor gloom deepened a day after the Federal Reserve said it would begin buying government bonds as a way to stimulate the economy.
News of slower industrial growth in China and a disappointing economic indicator in Japan helped send stocks plunging first in Asia, then in Europe and the US.
Investors got more bad news after trading ended in the US Cisco Systems Inc's revenue in the company's latest quarter fell short of analysts' expectations.
When markets settled, the Dow had dropped 265.42, or 2.5 per cent, at 10,378.83, its largest slide since it fell 268.22 on June 29.
The Standard & Poor's 500 index fell 31.59, or 2.8 per cent, to 1089.47, slipping below 1100, a key psychological level.
Falling and holding below that level could lead to more selling as computer-driven trading sets in.
The Nasdaq composite index fell 68.54, or 3.01 per cent, to 2208.63.
The Nasdaq tends to have the biggest losses when stocks are falling sharply because many of its component companies are smaller businesses that struggle the most in a weak economy.
Trading volume was fairly light on the NYSE at 1.2 billion shares.
Trading has been particularly slow, even by summer standards in recent days as uncertainty about the economy led many investors to exit the market completely.
Low volume also can exaggerate swings in the market.
The Chicago Board Options Exchange's Volatility Index rose 3.02, or 13.5 per cent, to 25.39.
The VIX is known as the market's fear gauge because a rise signals traders are expecting more drops in stocks.
European stock markets closed sharply lower on Wednesday after the US Federal Reserve warned that the US recovery was stalling and that it would take fresh stimulus measures to get it back on track.
Dealers said the warning only confirmed what many had feared after recent disappointing data, especially last week's worse-than-expected employment report, which stoked growing fears of a double-dip recession.
Data earlier on Wednesday also showed a marked slowdown in the Chinese economy, hitting sentiment badly in Asia and compounding fears that one of the world's growth engines might not be able to drag its peers forward.
At the same time, a Bank of England growth downgrade for the British economy added to the negative tone and offset recent strong eurozone figures.
Second quarter German growth figures, due on Friday and which are expected to be very good, will be closely examined for any sign of approaching weakness.
In London, the FTSE 100 index of leading shares closed down 131.2 points, or 2.44 per cent at 5245.21 points.
The German DAX lost 132.18 points, or 2.10 per cent, to 6154.07 and in France, the CAC 40 tumbled 102.29 points, or 2.74 per cent, to 3628.29.
How we fared yesterday
Australian shares joined a global retreat, dropping the most in nine weeks, as worries about the global economy outweighed a bumper profit result from the Commonwealth Bank. Banks, miners and information stocks led falls.
The benchmark S&P/ASX200 Index ended the day down 85.2 points, or 1.9 per cent, at 4455.5 points, while the broader All Ordinaries Index had fallen 83.3 points, or 1.8 per cent, to 4479.5 points.
Commodities
World oil prices fell sharply in line with tumbling global equity markets as investors set aside a positive International Energy Agency report on demand.
New York's main contract, light sweet crude for September, dropped $US2.23 to end the day at $US78.02.
London's Brent North Sea crude for delivery in September sank $US1.96 to $US77.64 a barrel.
News of falling US oil reserves and increased demand worldwide did little to push prices higher.
The US government reported on Wednesday that crude inventories fell by three million barrels last week to 355 million barrels.
Earlier, the Paris-based International Energy Agency raised its estimate for world oil demand this year by 80,000 barrels per day, and for next year by 50,000, on the basis that the global economy grows 4.5 per cent this year and 4.3 per cent in 2011.
The revised figures mean total demand this year would rise 1.8 million barrels per day or 2.2 per cent to 86.6 million. It would then rise by 1.3 million barrels per day or 1.5 per cent to 87.9 million next year, according to the IEA.
Economic recovery is pushing up estimates of oil demand this year and next, but there are dangers to growth in advanced nations and some emerging countries, the IEA added.
The IEA is the oil strategy and monitoring arm of the 31-member Organisation for Economic Co-operation and Development.
December gold was the only key metal to rise in overnight trading, closing up $US1.20 at $US1199.20 per fine ounce.
September silver closed down 25.6 US cents at $US17.902 per fine ounce, and September copper fell 5.85 US cents to $US3.2540 per pound.
October platinum fell $US16.40 to $US1,520.60, and September palladium also fell, by $US5.90 to $US464.70.
AAP, with BusinessDay
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