Stocks fall on grim global economic outlook

A G20 pledge fails to impress investors as Europe and US are told to gain control over their deteriorating economies.

The World Trade Organisation has cut its 2011 trade growth forecast to 5.8 per cent from 6.5 per cent as earlier predicted, amid increasing economic uncertainty.

“Members must remain vigilant. This is not the time for go-it-alone measures. This is the time to strengthen and preserve the global trading system so that it keeps performing this vital function in the future,” warned Pascal Lamy, director-general of the WTO, in a statement on Friday.

Asian stocks have fallen to a 16-month low and emerging market currencies have fallen amid fears that the developed world is falling back into recession.

A pledge from the G20 to preserve financial stability have also left investors largely unimpressed.

Equity markets pulled back from the depths of their slump and profit-taking lifted the euro on Friday after a statement committed the Group of 20 major economies to “take all necessary actions” and said central banks stood ready to provide liquidity.

But market players said any market bounce would probably be short-lived.

Stark warnings

The heads of the IMF and World Bank issued stark warnings on Thursday that Europe and the US needed to gain control of their deteriorating economic crises or risk “suffocating” the global economy.

Opening the annual meetings of the two key global lenders, they also warned poorer countries to get their houses in order to be able to endure the fallout from the advanced-economy crises.

“Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world … Not to do so is irresponsible,” Robert Zoellick, the World Bank president, said.

“Some developed country officials sound like their woes are just their business. Not so.”

The primary problem dragging down global growth, Christine Lagarde, the managing director of the International Monetary Fund said, is the heavy government and household debts and capital-weak banks in the advanced economies.

This all “could actually suffocate the recovery”, she said.

To get past the crisis of massive debt and deficits, Lagarde said that advanced countries needed to prioritise balancing their budgets.

“Time is of the essence, not just for the United States but for all advanced economies.”

David Cameron, Britain’s prime minister, blamed the eurozone countries and the US for the turmoil, saying they must get a grip on their vast debts.

“It’s important that we are clear about the facts. We are not quite staring down the barrel but the pattern is clear. Growth in Europe is stalled. Growth in America is stalled,” he said during his first address to the UN General Assembly on Thursday.

Dire outlook

Alarm at the US Federal Reserve’s dire outlook for the world’s biggest economy at its two-day policy meeting this week pushed world stocks to 13-month lows as investors shed risky assets from portfolios and scurried to safer havens.

MSCI’s broadest index of Asia Pacific shares outside Japan was down 2.2 per cent, having earlier fallen as much as three per cent to its lowest level since May 2010.

European stocks were expected to bounce after falls of nearly five per cent on Thursday, with financial spread better calling the major indexes in London, Paris and Frankfurt up 0.8-1.5 per cent.

Tokyo markets were closed for a holiday.

The G20 statement came as finance ministers and central bankers met in Washington, under pressure from investors to show action in the face of rising stresses in the financial system.

Several European banks have seen their share prices fall sharply and their cost of funding rise as investors worried about their exposure to debt issued by Greece and other debt-heavy euro zone countries.

Global stocks as measured by MSCI’s All-Country World index are now in bear market territory – often defined as a fall of 20 per cent or more – having fallen 22.9 per cent from their 2011 high in May.

Asian stocks have broadly unperformed since a global rout in early August, with MSCI’s regional ex-Japan index 27.5 per cent below its year high, reached in April.

The euro climbed by as much as 0.8 per cent earlier after Jiji news agency reported that Group of 20 officials were working towards an emergency statement, stirring hopes for action to soothe jitters over the euro zone’s debt crisis.

The beleaguered single currency remained up on the day after the G20 pledged to support banks, trading up around 0.4 per cent at $1.3510.

Against the yen, the euro rose 0.5 per cent to around 103.15 yen, having bounced back from Thursday’s trough of 102.211 yen, its lowest in more than 10 years.

S&P 500 futures stabilised and were trading up 0.9 per cent, suggesting Wall Street stocks would open up later after a drop on Thursday of around 3 per cent – the second in as many days.

Despite their better growth prospects than the indebted West, Asia’s emerging markets have been hit hard by the sell-off, partly due to fund managers closing out profitable positions to cover losses elsewhere in their portfolios.

Action pledged

South Korea, where the main stock index fell more than four per cent, became the latest emerging economy to pledge action to stem its falling currency on Friday after Brazil moved to protect its currency from a sharp slide, in what appeared to be a sudden shift in strategy.

Commodity markets, copper in particular, bore the brunt of the global rout that accompanied the Fed’s gloomy outlook, with Brent crude oil futures posting their biggest single-day loss in six weeks on Thursday, as the Reuters-Jefferies CRB commodity index lost 4.4 percent.

Copper fell further on Friday, losing 3.5 per cent to $7,405 a tonne, but oil steadied, with Brent crude up 0.5 per cent at $106 a barrel and US crude up 0.2 per cent at $80.67.

Gold, which hit a record above $1,920 an ounce earlier this month, has been losing out as the safe-haven asset of choice in recent weeks as investors put their faith in the dollar and US treasuries, which in turn have made the precious metal more expensive for holders of other currencies.

Gold rose around 0.4 per cent on Friday to around $1,742 an ounce, but remained on track for its third straight week of losses.