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While you were sleeping: Stocks drop on Ireland, China

Wednesday 17th November 2010

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Equities on Wall Street and in Europe dropped on concern about the risk Ireland's debt problems posed to the euro zone as the country was discussing a potential bailout with European Union officials. European officials were weighing a rescue package of 80 billion to 100 billion euros for Ireland and a separate, smaller bailout for its banking sector, the Wall Street Journal reported on Tuesday.

In early afternoon trading, the Dow Jones industrial average shed 1.76%, the Standard & Poor's 500 Index dropped 1.74% while the Nasdaq Composite Index also declined 1.74%.

"What's the driving the euro is just all the sovereign risk out of Europe," Jack Iles, a portfolio manager at MFC Global Investment Management in Boston, said. "That's driving sentiment across the board for risk assets and that probably will not go away in the next 48 hours."

Prime Minister Brian Cowen told Parliament in Dublin tonight that Ireland hasn't lodged an aid request and the goal is "a credible, efficient and above all workable solution that will provide assurance to the markets."

"We are in a survival crisis," EU President Herman van Rompuy said at the European Policy Centre in Brussels today. "If we don't survive with the euro zone we will not survive with the European Union."

Exacerbating concern on equity markets in Europe and North America were reports that China was set to boost measures to keep inflation in check, such as through food price controls.

Chinese stocks dropped almost 4% while commodities such as oil declined as well since the nation is one of the world's top consumers of raw materials.

In Europe, the Stoxx 600 dropped 2.3% to 265.98 at the close in London, the largest one-day loss since July 1.

The Dollar Index, which measures its value against a basket of currencies, rose 1.11% to 79.39.

The euro fell and would likely remain weak in the near term with the debt problems in Ireland and other European economies. The euro was last down 0.6% at US$1.3498.

The greenback hit a six-week high of 83.51 yen,

Oil dropped on the stronger US currency and concern about China's monetary policy, while the euro zone worries also weighed on commodities.

US crude for December dropped as much as US$1.56 per barrel to US$83.30 earlier today. It was trading at US$83.45 by 1425 GMT. ICE Brent for January fell US$1.20 to US$85.56.

"The prospect of further monetary tightening in China is worrying for all commodities," Carsten Fritsch, analyst at Commerzbank in Frankfurt, said. "So far Chinese oil demand has been robust, but there are concerns that it could be seriously affected by higher rates, for example."

Gold also declined. Spot gold was trading at US$1,341.04 an ounce by 1615 GMT, down from US$1,360.09 the previous day. U.S. gold futures dropped 2% to US$1,341.10 an ounce.

Even so, the precious metal should retain its shine for investors. Billionaire investor and philanthropist George Soros might be unwinding some of his gold bets, but said gold should remain strong as long as conditions like low interest rates prevailed.

"The conditions for (high) gold are pretty perfect," Soros said in a speech in Toronto Monday evening to accept the Globalist of the Year award from the Canadian International Council.

"The big negative is that too many people know this and a lot of hedge funds are very exposed ... Gold has a tendency to go parabolic," he said, pointing at its tendency to fall as quickly as it rises.

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