Fear of recession threatens stock market collapse

The shock caused by the latest employment data in the U.S. sharply lowered stock market index values on global markets last week. Investors are concerned about the possibility of a recession in the U.S. following the crisis in the credit markets.

In such conditions, the New York Dow Jones index fell by 1.8 percent to 13,113 points. The S&P index weakened by 1.4 percent to 1,454 points. Both indices recorded their worst week since early August. The technology Nasdaq dropped by 1.2 percent over the past week to 2,566 points. Most stocks experienced sharp corrections after the U.S. Department of Labor released data on the decline in employment in the U.S. in August, a month marked by turmoil in financial markets due to the outbreak of the crisis in the U.S. subprime mortgage market. A net loss of 4,000 jobs shocked investors and analysts who expected U.S. employers to create 110,000 new jobs, following the 92,000 jobs created in July.

This data cemented market participants’ expectations that the U.S. central bank will lower the key interest rate at its next meeting on September 18. “The employment data was so negative and bad that fears of a recession in the U.S. economy are now reviving in the market,” described the market sentiment Scott Wren, a strategist at A.G. Edwards. Evidence of a potential outbreak of serious economic problems was also the data showing a record 12.2 percent drop in existing home sales in July in the U.S., released earlier in the week. The data that private entrepreneurs hired the fewest workers in August in the last four years, only 38,000, was also disappointing. This is significantly below the 83,000 that economists had expected.

Technology companies, which are mostly lightly leveraged, benefited during the last few days of trading due to the view that this sector could be a safe haven for investors’ money while the mortgage market crisis pressures the prices of financial stocks and other sectors of the economy. “There is quite good demand for technology stocks, which is not surprising. I think technology companies are performing well, even in conditions of slowing economic growth,” stated Owen Fitzpatrick from Deutsche Bank Private Wealth Management. European stock exchanges were also hit by a wave of stock selling following the shocking drop in employment in the U.S. and fears of a recession in the world’s largest economy. The London FTSE index fell by 1.8 percent on a weekly basis to 6,191 points. The Frankfurt DAX weakened by 2.6 percent to 7,437 points.

The reduction in employment in the U.S. economy for the first time in the last four years triggered sharp selling on European exchanges on Friday, when stock index values fell at the highest rate in the last three weeks. During the week, market participants closely monitored signals from key central banks regarding interest rates and their activities aimed at increasing liquidity in the financial system. On Thursday, the overnight interest rate on euro deposits weakened to 3.9 percent, down from 4.5 percent earlier in the day, following the announcement from the European Central Bank (ECB) that it would hold a quick tender in the money market, which further limited the bank’s room to raise interest rates above the current 4 percent.

In that tender, it lent banks more than 42 billion euros, in addition to the already lent 211 billion euros in the last month. As analysts point out, it is clear that both the ECB and the British and U.S. central banks are trying to keep overnight interest rates close to the level of key interest rates. “We will carefully monitor all signals from the ECB,” says Heino Ruland, a strategist at the German brokerage firm Steubing in Frankfurt. “If central banks inject huge amounts of money into their money markets to keep interest rates low, then they cannot lower the key interest rate. Conditions in the money markets are tense,” he added. In conditions of increased uncertainty regarding the situation in the markets, stocks of commodity producers were the biggest winners.

The biggest jump was achieved by the shares of the mining company Rio Tinto, strengthening by three percent due to renewed speculation that rival BHP Billiton might be interested in acquiring it. The rise in mining sector stocks was also supported by a jump in copper prices, and among the winners were also shares of Anglo American (2.1 percent) and BHP Billiton (1.8 percent). The Tokyo Stock Exchange Nikkei index fell by 2.7 percent during this period to 16,122 points. (H)