Stocks slide again on debt fears

8 August 2011 Last updated at 03:49 ET

Continue reading the main story

European stock markets have stabilised after the European Central Bank announced its intention to buy up government debt.

Spanish and Italian markets jumped in early trading, while all major European indexes gained ground. The yields on Madrid and Rome bonds also fell.

After Asian shares fell overnight, there had been fears that European markets would follow suit.

But in London and Paris, the FTSE and Cac indexes were up about 1%.

The Spanish and Italian markets both rose by more than 2%.

Earlier, Asian indexes lost ground as investors worried about the impact of rating agency Standard and Poor’s decision to downgrade the US on Friday night.

Japan’s Nikkei index fell 2.4%, South Korea’s Kospi lost 5%, Hong Kong’s Hang Seng was down 4%, and Mumbai’s Sensex slid 3%.

Last week saw trillions of dollars wiped from the value of global markets, with the Dax losing about 13% of its value and the FTSE dropping 10%.

More wobbles?

Analysts warned that markets would remain volatile in coming weeks, despite the G7 group of developed countries and the ECB vowing to support financial stability.

On Sunday, the bank indicated it would start buying eurozone bonds, hoping to instil confidence that some of its biggest economies would not default on their debt obligations.

The bank did not say which bonds it would buy, but analysts expect the focus to be on Italian and Spanish debt.

Analysts were mixed in their reaction to the move, and said the markets would be hoping to see more action in Europe.

“Clearly, the S&P downgrade is a very symbolic and historic event,” said Paul Sheard of Nomura. “But really the epicentre of this crisis, unlike 2008, is very much in the eurozone.”

“So I think the markets will be focusing very much on what the euro area policymakers will do over the coming weeks.”

In a separate statement, the G7 group of developed countries said members were “determined to react in a co-ordinated manner” to preserve financial stability.

Knock-on effects

S&P’s downgrade of US debt has also underminded investors’ confidence.

“The ratings downgrade has been an unprecedented event,” said Alvin Liew of UOB Bank in Singapore.

Standard & Poor’s cut the US’s top-notch AAA rating for the first time, citing concerns about the size of the country’s budget deficit and the acrimonious and protracted battle in Congress to raise the country’s debt ceiling at the eleventh hour. It has graded the US AA+.

The fear for many investors is that the US economy will slow further, and even enter a double-dip recession.

This in turn would hurt Asia, which relies on the US, the world’s biggest economy, to buy billions of dollars of exports every month.

Gold standard

With an increased sense of economic risk, investors continued to make changes to their asset holdings on Monday.

As a result, they sold crude oil, with the main US contract down 3.5%, on concerns demand will slide.

Gold, meanwhile, hit record highs in Asian trading, nearing $1,700 an ounce, as investors looked to buy assets that offered less risk.

“There are few places can obviously hide,” said Greg Gibbs of RBS in Sydney. “And the ones that can hide in are doing very well. Gold is the beneficiary because there is no central bank to sell it.”

Monday’s drop in shares comes after European markets tumbled on Friday.

Europe’s main indexes, including the UK’s FTSE 100 and Germany’s Dax, dropped by as much as 4%.

This was after the US’s Dow Jones index tumbled by more than 500 points – its worst day’s trading in over two years – on Thursday.

While by the end of trading on Friday, US markets had stabilized and the Dow closed up 0.5% – the Dow still ended the week 5.8% lower.

— ’re ’s , . : A ‘Malign Intellectual Subculture’ – George Monbiot Smears Chomsky, Herman, Peterson, Pilger And Media Lens.