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While you were sleeping: Shares slump amid pessimism

Friday 5th February 2010

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Stocks dropped across Europe and on Wall Street as pessimism about the outlook for sovereign debt, earnings and the US jobs market shook investor confidence.

In early afternoon trading, the Dow Jones Industrial Average had fallen 1.95%, the Standard & Poor’s 500 Index  was 2.26% lower and the Nasdaq Composite had shed 2.21%.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ rose 16.8% to 25.23.

The Dow Jones Stoxx 600 dropped 2.7% to 242.70. The FTSE 100 lost 2.17%, Germany’s DAX dropped 2.45% and France’s CAC 40 slid 2.75%.

“It’s a cocktail of a lot of things. China wants to slow down growth and the financial crisis with Greece, Portugal and Spain are focal points that show that it’s not an ideal world,” Manfred Hofer, the head of equity analysis at LGT Capital Management in Pfaeffikon, Switzerland, told Bloomberg News.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 2.5% to 263.78.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.58% to 79.87.

While Jean-Claude Trichet, president of the European Central Bank, told reporters at a briefing in Frankfurt that he believed that the Greek government was moving in the right direction to contain its finances, investors seemed more focused on what the European Union’s monetary affairs commissioner, Joaquin Almunia had said a day earlier.

Almunia said Greece, Portugal and Spain all have “sizeable” public deficits and each faced a “permanent loss of competitiveness”.

Trichet, who announced the ECB’s decision to keep its key interest rate at 1%, said the bank would extend “enhanced credit support” to the banking system for now. “In order to counter effectively any threat to price stability over the medium to longer term, the liquidity provided will be absorbed when necessary.”

The euro nosedived after Trichet spoke amid concerns public finances were likely to forestall economic activity.

"Basically (Trichet is) acknowledging a very drawn-out, sluggish recovery subject to intense uncertainty," Brian Dolan, chief currency strategist at in Bedminster, New Jersey, told Reuters. "The key thing is that rates are not moving anytime soon. With that and continued concerns over the fiscal situation, it's just another weight around the euro's neck."

In late morning New York trade, the euro was trading down 0.9% on the day at US$1.3780, close to an earlier low of US$1.3778, its weakest since June 2009. Weakness was partly attributed to widening Greek, Portuguese and Spanish bond yield spreads over German benchmarks.

Traders said an options barrier at US$1.3800 was broken by sellers, opening up further downside.

The U.S. dollar was 0.7% lower at 90.31 yen. The euro fell 1.6% to 124.46 yen.

The New Zealand dollar hit a five-month low after data showed the country's jobless rate hit a 10-year high while weak Australian retail sales data helped push the Aussie to a four-month low.

The Bank of England earlier kept its key rate at a record low of 0.5% and paused its bond-purchase program.

The U.S. economy continues to prove hard to measure as the latest data showed that jobless claims last week unexpectedly increased, suggesting the labour market is lagging. The January jobless report is due tomorrow with most economists forecasting a slight increase in the number of new jobs.

The concern with the jobless claims is that consumers are going to be hard pressed to help the U.S. economy return to growth if they can’t find work.

Gold fell the most in two months, with April futures losing 3.4% to US$1074.10 an ounce in New York.

VTB Capital analyst Andrey Kryuchenkov told Reuters that the technical picture looked weak for gold, with the metal suffering from a loss of confidence after it failed to sustain gains above US$1120 an ounce earlier in the week.

Crude oil for March delivery fell as much as 3.2% to US$74.50 a barrel, the biggest decline in three months.

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