Global policy actions fail to halt stocks rout

WASHINGTON/LONDON, (Reuters) – Political leaders  failed to halt a global stock market rout that gathered steam  yesterday as investors lost confidence that Europe and the  United States can rein in their budgets quickly and fear spread  of a double-dip recession.

The European Central Bank swept into the bond market to buy  up Italian and Spanish debt and sling a safety net under the  euro zone’s third and fourth largest economies. But bickering  persisted in Europe over a longer-term rescue plan.

In the United States, President Barack Obama called for  urgent action on the U.S. budget deficit but his proposal on  taxes was promptly rebuffed by Republicans.

The G7 finance ministers’ and central bankers’ pledge on  Sunday to help smooth markets if needed provided little  solace.

Selling that began in Asia and Europe accelerated in the  United States, where the broad Standard and Poor’s 500 index  plunged 6.7 percent to close at 1,119.46, its worst sell-off  since Dec. 1, 2008. The Dow Jones shed 634.76 points to  10,809.85.

A huge blow to investor confidence was the Standard and  Poor’s downgrade of the U.S. sovereign credit rating late  Friday, which compounded spreading concerns that the worsening  euro-zone debt crisis and a faltering U.S. economy heighten the  risks of a double-dip recession.

“People are asking, can the economy still grow in face of  all this?” said John Carey, portfolio manager at Pioneer  Investment Management in Boston, with $260 billion under  management.
Realization on both sides of the Atlantic that the  political obstacles to quick budgetary reform are so huge and  the monetary options so limited, it has deepened the  pessimism.

The worsening market turmoil puts significant pressure on  the U.S. Federal Reserve at its regular policy meeting today to announce some fresh measures of support for a  damaged U.S. economy.

“If the Fed does nothing, it could prove to be a  disappointment at this point,” said JP Morgan analysts.

Stock losses have wiped more than $3.8 trillion from  investor wealth globally in the last eight days and sent  investors rushing for safety in the Swiss franc, the Japanese  yen and gold. In the United States, estimates of recession  risks are rising. Goldman Sachs had put them at one in three  last week, before the latest sell-off.

“This massive move in the equity market does dim the  economic outlook for the next six months,” said Carl  Riccadonna, senior U.S. economist at Deutsche Bank in New York.  “We would put the recession odds at about 40 percent and about  two weeks ago they were at about a 10 percent chance.”

The G7 financial policymakers from major industrialized  nations said on Sunday they stand ready to provide extra cash  if markets seize up, are consulting regularly and could  cooperate to smooth volatile FX markets if needed.

Particularly worrisome was a more than 20 percent plunge  in the shares of Bank of America, the largest U.S. bank. AIG  sued it for $10 billion for allegedly deceiving investors, on  top of mounting concerns about the size of its potential losses  from mortgages litigation and questions about management. The  bank has shed nearly one third of its market value in three  days.

On the political front, Obama said he hoped that Standard  and Poor’s stripping the United States of its prized AAA credit  rating would add urgency to U.S. budget cutting plans. Standard and Poor’s cut the ratings of credits tied to the  U.S., sovereign debt to AA-plus, namely government mortgage  agencies, clearing houses and insurers. The Treasury market  soared on Monday despite the downgrade as investors fled  stocks.

Obama called for both tax hikes and cuts to welfare  programs as part of the $1.5 trillion in deficit reduction that  a special committee would deliver in late November. But  Republican House Speaker John Boehner once again rejected the  call, saying tax hikes were “simply the wrong approach.”

Obama also spoke with Italian Prime Minister Silvio  Berlusconi and Spanish President Jose Luis Zapatero, welcoming  measures by their governments to address the economic turmoil  in Europe.

Traders estimated the ECB bought about 2 billion euros in  Italian and Spanish debt after it agreed on Sunday to broaden  its bond-buying program for the first time to halt an attack on  the Mediterranean countries. Italian and Spanish yields  declined sharply.

“The intervention by the European Central Bank this morning  seems to have been working,” Irish Finance Minister Michael  Noonan told RTE public radio.
“Last week the risk was that as bond rates in Italy went  towards 7.0 percent, they’d be driven into some kind of bailout  program. They have fallen by almost one percent this morning so  they are well out of the bailout territory now.”

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