A FRANTIC sell-off saw stock markets tumble yesterday while commodities collapsed, as spooked investors retreated from mounting signs of global economic weakness.
The world economy is “in a danger zone”, World Bank chief Robert Zoellick said yesterday, while International Monetary Fund (IMF) boss Christine Lagarde again said that the path to recovery is “narrowing”.
At the G20 summit in Cannes, six world leaders including Prime Minister David Cameron warned: “External risks to the stability of our banks and our economies are reaching pre-crisis levels.” In an open letter to President Sarkozy, the six called for Eurozone countries to “act swiftly to resolve the crisis”.
German, French, Spanish and Italian credit default swaps (CDS) all hit new highs yesterday as market gloom deepened and concern over the ability of Eurozone governments to pay their debts continued to mount.
Their comments followed a bearish statement from the US Federal Reserve on Wednesday night, during which it launched its latest effort to stimulate the economy – “Operation Twist”.
Over two per cent was lost from equities from various corners of the world yesterday, according to the MSCI AC World Index. The Dow Jones closed down 3.51 per cent, the FTSE lost 4.7 per cent and merging markets stocks slid 6.5 per cent
“It’s a combination of no QE3, low economic growth, China’s PMI falling and European PMI data either slightly or widely below expectations,” said analyst Thorbjorn Bak Jensen of A/S Global Risk Management.
The gloomy outlook for the world economy weighed on commodities, with investors concerned that a stuttering recovery will hammer demand for energy and metals.
China’s factory sector shrank for a third consecutive month in September, on sagging demand.
WTI crude oil sank around 5.5 per cent yesterday, while copper – often seen as a bellwether of industrial activity and the wider economy – fell off a cliff, losing 7.5 per cent in London trading.
Even gold and silver, often seen as safe havens at times when equities take a bath, crumbled under the pressure of a rising dollar, although gold later recovered some losses.
The dollar index rose to seven-month highs after the Fed’s Operation Twist. The twist heightened the appeal of shorter-dated US debt and gave the greenback’s yield-appeal an edge over that of other currencies, which in turn hit gold.
With few places to run, some investors turned to supposedly safe-haven bonds. Yields on 30-year Treasuries fell by seven per cent, touching as low as 2.76 per cent as prices rose.