Recession specter haunts markets

Stock markets on the Chinese mainland yesterday joined the free fall worldwide by hitting a new low in 25 months as fears of a global economic recession continued to spook investors.

Sell-offs were the order of the day, with Hong Kong shares recording their biggest one-day fall in more than a decade and Tokyo's Nikkei ending at the lowest level in 26 years.

The benchmark Shanghai Composite Index dropped 6.32 percent, or 116.27 points, to close at 1,723.35. The Shenzhen index slid 6.89 percent, or 424.14 points, to close at 5,734.81.

Almost all sectors fell, with nearly 600 stocks dropping by the daily limit of 10 percent.

Investors were increasingly worried about the impact of the global financial turmoil on the wider economy, analysts said.

"The dive in global stocks last Friday led to investor panic, which was exacerbated by the absence of a stimulus package from the government over the weekend," said Wu Feng, an analyst at TX Investment Consulting in Shanghai.

Despite recent measures to stimulate growth, including interest rate cuts and export tariff rebate increases, the market will not recover in the short term as investor confidence remains weak, said Huang Xuejun, an analyst at Everbright Securities.

In Hong Kong, the blue-chip Hang Seng Index tumbled 1,602.54 points, or 12.7 percent, to 11,015 - its worst close since May 2004. The benchmark is off more than 50 percent this year.

"Markets are gripped by fear," said Benjamin Collett, head of hedge fund sales trading at Daiwa Securities SMBC Co. "You actually feel sick watching this move."

In Tokyo, the Nikkei 225 index closed down 6.4 percent to 7,162.90 - the lowest since October 1982 - with exporters like Toyota Motor Corp and Sony Corp hit hard because of the surging yen.

The flight of shell-shocked investors from emerging markets and massive unwinding of investments in higher-yielding but riskier assets, has propelled the yen - a funding currency of choice for such deals - to multi-year highs.

The Group of Seven warned yesterday that the rising yen posed a threat to financial and economic stability, the latest coordinated effort by the world's richest nations to curb the worst financial crisis in 80 years.

A brief G7 statement said the yen's rapid 12 percent ascent against the dollar threatens Japanese exports as the world's second-largest economy lurches toward recession.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the group said.

Elsewhere in Asia, stocks in Taipei, Australia, the Philippines, Indonesia, Thailand and India closed sharply down.

South Korea's KOSPI was the only Asian bright spot, closing up nearly 1 percent. The index rallied after the country's central bank slashed its key interest rate yesterday by three-quarters of a percentage point - its largest cut ever - in an effort to fend off the global financial turmoil.

Markets in Singapore and Malaysia were closed for holidays.

Selling spread to Europe when markets opened there. But European stock markets recovered much of their early losses, helped by investors looking for bargains after sharp drops in Asia overnight

Britain's FTSE 100 index was 0.2 percent lower at 3,875 after having been down 4.9 percent in the morning. Germany's DAX, which was likewise down almost 5 percent earlier, recovered to trade only 0.5 percent lower at 4,276.

The CAC 40 in France fared worse, falling 2.1 percent at 3,126 after being almost 7 percent lower.

With the US Federal Reserve almost certain to slash interest rates later in the week, British Prime Minister Gordon Brown hinted that central bank action may be more widespread.

"Now inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the Bank of England, round the world to make a decision about interest rates," he told the BBC.

The Dow Jones industrial average was down just 7.65 points, or 0.1 percent lower, at 8,371.30 in early trading. They were almost 1 percent lower on the open.

Questions:

1. What was analyst Wu Feng’s reason for why stocks dropped so much on Monday?

2. Why does Huang Xuejun say the markets will not recover in the short-term?

3. What is happening to the yen that may cause Japan to enter into a recession?

Answers:

1. The government did not announce a stimulus package over the weekend.

2. He says investor confidence is weak.

3. It is rising too quickly against the dollar, creating financial and economic instability.