Global Markets Gloom Darkens, Wall Street Extends World Sell-Off

Bikram Pandey
02 Jun, 2012
New York City

The global markets gloom darkened after a string of weak economic data from the U.S., India, China and Europe. In addition, Brazil lowered its rate to a record low and bond yields of U.S. declined to record low of 1.43% and German and Swiss negative yields deepened. Gold gained 4% and oil fell 4%.

[R]3:00 PM New York – The global markets gloom gathered momentum after a string of weak economic data from the U.S., India, China and Europe. In addition, Brazil lowered its rate to a record low and bond yields of U.S. declined to record low of 1.43% and German and Swiss negative yields deepened. Gold gained 4% and oil dropped 4%.[/R]

The losses on Wall Street added to the gloom in global markets as the latest weak U.S. employment data dashed all hopes of economic recovery or stabilization.

The weak increase in U.S. private sector jobs for the third month in a row and weakest total monthly jobs addition in a year added to the rising uncertainties. And, unemployment in Europe hit a record high of 11% and China faces a slowdown in construction industry and India battles elevate structural inflation.

In New York trading, the S&P 500 and the Nasdaq indexes dropped 2.5% and 2.8% respectively and the narrow index of large companies the Dow Jones Industrial Average turned negative for the year.

Around the world, the indexes in UK, France, Japan and Canada turned negative and in Hong Kong and Australia barely managed to stay in the positive as in India trim double digit gain to 3% for the year.

The benchmark index in Brazil extended yearly losses to 6% and in Spain plunged 29% and in Italy to a loss of 15% as the two European nations struggle with mounting debt stress and rising unemployment.

The index in Russia dropped 7.6% for the year as crude oil prices fall 18% in the year so far. Energy exports provide 50% of Russian government revenues last year.

Wall Street extended losses after employers added 69,000 jobs in May and unemployment increased to 8.2%. The weather played a significant role in pulling forward jobs in warmer winter months but market overlooked the seasonality and focused on the weak data especially in the full time employment.

The market gloom also darkened after European nations reported record 11% unemployment and bond yields of Germany and Switzerland turned negative. In New York, the U.S. Treasury 10-year bond yields declined to 1.43%, a record low as employment recovery lagged the market perception.

As if the stress in the markets was not high enough there are growing signs of economic slowdown in once the fastest growing nations, China, India and Brazil. China is battling bubble like construction industry that may drag down the banking sector if the government holds back spending.

In India, government has failed to cut its budget deficit, trade deficit and current account deficit as the weak coalition government focuses on social spending and depreciating the rupee and avoids tackling the hard issues of balancing budget and solving structural food price inflation.

Yesterday, India reported its eight consecutive quarterly economic growth decline and the rupee depreciated more than 10% in the last three months.

Brazil lowered its interest rate by 50 basis points to the record low of 8.5% and below the 8.75% during the 2009 crisis as government struggles to hold onto economic growth. The central bank has cut interest rates seven times since August as world economic outlook deteriorated.

Brazil’s economy growth has declined from 7.5% in 2010 to 2.7% last year and in expected to drop further to 1% this year. The strong currency and high inflation has cut into consumer spending and the real dropped to a 3-year low this month as interest rates began to slide.

Real has lost one third of its value in nine months and in neighbouring Argentina the peso fell to a record low of 4.5 against the dollar this week.

Stocks in Japan extended losses as economic slowdown worries in China and U.S. added to a list of market worries. The benchmark Nikkei index turned negative for the year after 10.3% loss in May as domestic companies focus on repatriating capital to rebuild manufacturing after devastating earthquake last year.

The Australian indexes extended losses for the third day but closed up the week 0.9%. The dollar edged lower and declined 7% in the last four weeks. Australian economic growth is more than ever linked to the growth in China and energy and commodities exports to South Korea and Japan.

The faltering growth in China is expected to have a pronounced impact in Australia and the “bubble like” housing prices are expected to pop if exports to China and Asian nations decline in the next few quarters.

Commodities, Bonds and Currencies

The yields on 10-year U.S. bond decreased to multi-decade low of 1.57% and 30-year U.S. bond edged lower to 2.66%.

The U.S. dollar edged down to $1.241 to one euro and gained against the Japanese yen to 78.14 in New York trading. Real in Brazil extended losses after the central bank cut the rate to record low of 8.5% and Argentine peso traded at a new low against dollar at 4.47.

Immediate delivery futures of Texas crude oil decreased $3.22 to $83.31 a barrel and Brent crude futures fell $3.14 to $98.73. Futures of natural gas decreased 0.10 cents to $2.32 per mbtu and gasoline price decreased 5.8 cents to 266.45 cents a gallon.

In metals trading, copper decreased 4.3 cents to $3.32 per pound, gold decreased $61.20 to $1,625.40 per ounce and silver added 69 cents to $28.46.