World stocks tumble on US deflation fears
Pan PylasWorld stock markets slumped Wednesday amid concerns about sinking consumer prices in the U.S. and the shaky future of the Big Three U.S. automakers.
Wall Street capped the day with a late-session downturn that sent major indexes to their lowest levels since March 2003. The Dow Jones industrial average shed 427.47 points, or 5.07 percent, to 7,997.28.
The FTSE 100 index of leading British shares closed down 202.87 points, or 4.8 percent, at 4,005.68, while Germany's DAX ended 225.38 points, or 4.9 percent, lower at 4,354.09. The CAC-40 in France finished off 129.51 points, or 4.0 percent, at 3,087.89.
The U.S. Labor Department reported that consumer prices fell 1 percent in October from the previous month, the biggest fall since records began in 1947. While lower prices might be good for the consumer, they can dent corporate profits and stock market valuations.
Lower prices also raise the threat of deflation, a prolonged bout of falling prices that hasn't been seen in the U.S. since the Great Depression of the 1930s.
Meanwhile, other data showed that the U.S. housing sector continues to contract. The Commerce Department reported that construction of new homes plunged 4.5 percent last month to the lowest level on government records.
With this economic backdrop, investors are wary of returning in droves to the markets, even though stocks have been heavily sold off over the last few months.
"With housing reaching record level lows, there is little hope that this sector can help pull the economy out of recession," said Arek Ohanissian, an economist at the Centre for Economic and Business Research.
"The record fall in inflation further complicates the economic situation by increasing the possibility of deflation and thus adding another problem for the Federal Reserve to face," he added.
Investors are also worried about the economic fallout if Detroit's Big Three automakers — General Motors Corp., Ford Motor Co. and Chrysler LLC — cannot persuade lawmakers to give them a $25 billion bailout.
The worry is what would happen to the U.S. economy as a whole should any of the three collapse. Congressional Democrats have proposed using part of the $700 billion financial bailout package to pump into the ailing auto industry, but Republicans oppose such an approach.
"With the immediate future of the U.S. automotive industry hanging in the balance, there is little wonder that risk aversion has been a notable theme in equity markets today," said Neil Mellor, an analyst at the Bank of New York Mellon.
In Europe, financial stocks were being beaten down once again following Citigroup Inc.'s announcement of massive job cuts earlier in the week, with Barclays PLC, HSBC PLC, Commerzbank SA and Deutsche Bank AG all sharply lower. However, HBOS PLC rose as shareholders approved a government-backed takeover by Lloyds TSB PLC.
Mining companies, such as Anglo American PLC, Rio Tinto PLC and Xstrata PLC, were also sharply lower as fears about the scale of the economic downturn around the world weighed on commodity prices.
In Britain, deflation talk was not far away from the discussions at the last rate-setting meeting of the Bank of England, minutes to the meeting released Wednesday showed.
The bank's nine-member committee considered slashing interest rates by "possibly in excess of 200 basis points" or more than 2 percentage points to make sure that inflation did not undershoot the 2.0 percent inflation target over the medium term.
Though they opted instead for a 1.50 percentage point cut in the benchmark rate to 3.00 percent, its lowest in 54 years, the minutes suggest another sharp interest rate reduction could be coming at the next meeting in December.
Latin American stocks were caught in Wall Street's downdraft. Brazil's benchmark Ibovespa index fell 2 percent to close at 33,405, while Mexico's IPC index gave up 2.4 percent to 18,578. Argentina's Merval index lost 2 percent to 925, while Chile's IPSA fell 0.3 percent to 2,490.
Earlier in Asia, Japan's benchmark Nikkei 225 average fell 55 points, or 0.7 percent, to 8,273.22 as investors digested a 64 percent slump in first-half earnings at the country's biggest bank, Mitsubishi UFJ Financial Group Inc.
Australia's main index fell 0.7 percent as crude oil traded near a 22-month low and metals prices fell overnight. Hong Kong's Hang Seng index declined 0.8 percent to 12,815.80.
China bucked the trend with the Shanghai Composite Index surging 6.1 percent to 2,017.47 as market heavyweight Petrochina rallied on expectations the government will allow fuel prices to be hiked next month.
Oil slipped below $54 a barrel amid the tumbling equity prices and bleak economic news. Light, sweet crude for December delivery fell 77 cents to settle at $53.62 a barrel on the New York Mercantile Exchange, about where prices were in January of 2007.
In currency markets, euro inched up to $1.2602 in late New York trading Wednesday from $1.2579 late Tuesday, coming off an overnight high of $1.2814 as U.S. stocks recoiled. The British pound rose to $1.5025 from $1.4916, while the dollar slipped to 96.37 Japanese yen from 96.46.
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AP Business Writers Joe Bel Bruno in New York, Stephen Wright in Bangkok and Elaine Kurtenbach in Shanghai contributed to this report.