$16.3 trillion in stock value lost since Sept. 1; some brokers fear more drops

Signs of slowdown spiral around the world

Pessimism about the global economy deepened yesterday as fresh evidence of a worldwide slowdown showed up in feeble corporate profit reports from Asia, sinking commodities prices, and a scramble by emerging economies to prop up their sagging currencies and avert credit defaults.

The signs of trouble popped up around the globe. Japanese giants Sony and Toyota, as well as South Korea’s Samsung, the world’s largest maker of memory chips, flat-screen televisions and liquid crystal displays, posted weakened profits and sales outlooks. Toyota’s quarterly sales fell for the first time in seven years. Britain reported its first economic contraction since 1992.

Gloom about economic growth translated to low expectations for oil consumption. The Organization of the Petroleum Exporting Countries yesterday announced a cut of 1.5 million barrels a day in output – a move that still failed to arrest the slide in crude prices. Meanwhile, copper prices fell to a three-year low.

Investors around the world fled stocks and rushed to the relative safety of the U.S. dollar by pouring money into 30-year Treasury bonds, a refuge in times of uncertainty. That drove down the value of foreign currencies, from the ruble to the rupee and the zloty to the peso, forcing central banks to spend billions of dollars to prevent even further deterioration. The turmoil in currency markets threatened to reorder trade relations and complicate recovery efforts.

‘New stage’

“I think we’re moving into a new stage,” said Simon Johnson, former chief economist at the International Monetary Fund and now a professor at the Massachusetts Institute of Technology. “There is the danger of ever-widening spheres of disruption.”

The IMF stepped up its efforts to contain the expanding crisis, agreeing to a $2.1 billion rescue program with Iceland, whose financial meltdown triggered big losses for German and British banks. Belarus, Pakistan, Hungary and Ukraine have also asked the IMF for emergency loans.

Once again, fear gripped many of the world’s stock markets yesterday. Japan’s Nikkei index plunged 9.6 percent; India’s benchmark index dropped 11 percent; Brazil’s Bovespa index fell 6.9 percent; and Germany’s DAX index fell to its lowest level since May 2005.

In Japan, bellwether companies led the way down. Sony, the world’s second-largest consumer electronics company, fell 12 percent after its weak preliminary earnings report, in which it also sharply cut its profit forecast. Canon, the world’s biggest maker of digital cameras, dropped 9 percent. Korea’s Kospi index was down 20 percent for the week; Samsung fell 14 percent yesterday alone. In India, television news channels called it a “black Friday” as bearish investors were undeterred by the run-up to the most auspicious Hindu festival of good fortunes, Diwali, which is Tuesday.

Skittishness

While the fall in U.S. markets was less pronounced – the Dow Jones industrial average fell 3.59 percent – there were continuing signs of investor skittishness here, too. For instance, premiums on borrowing by most corporations remained prohibitively high.

Since Sept. 1, about $16.3 trillion worth of global stock market value has been erased. Although a drop in oil prices has put more money into the hands of consumers worldwide, analysts fear that the shrinking size of stock portfolios and falling house values will constrain consumer spending anyway.

Tobias Levkovich, a Citigroup equity strategist, said lower gasoline prices would act like a more than $150 billion stimulus for U.S. consumers. But that could be more than offset by a shrinking sense of wealth, especially among the top 20 percent of wage earners, who account for the bulk of equity investments and 40 percent of consumer spending.

Also, at the corporate level, there are already indications of fewer purchases of software, telecommunications equipment and services, and computer hardware. On Thursday, Microsoft predicted recessionary pressures in the months ahead and said it would slow hiring and cut expenses, particularly costs associated with data centers.

Lower consumer and corporate spending in the United States is likely to ripple around the world. “The global turmoil has had an indirect knock-down effect on India,” Duvvuri Subbarao, the governor of the Reserve Bank of India, said at a news conference at which he lowered India’s growth projection to 7.5 percent for this year. “Consequently, trade for emerging economies is becoming difficult.”

Brokers in Asia warned that this could be just the beginning of steep declines in the stock prices of major companies that depend on exports to the United States and Europe for much of their profit. “If Sony’s earnings are that bad, other firms’ earnings could also be considerably grim, and this is alarming investors ahead of earnings reports next week,” Tsuyoshi Segawa, an equity strategist at Shinko Securities, told the Kyodo news service in Tokyo.

Japanese companies’ plight has been exacerbated by the resurgent yen, which rose faster against the dollar in the past week than it has in the past 10 years. The currency’s value is rapidly eroding the competitiveness of Japanese exports, which were already plummeting due to collapsing demand in the United States and Europe.

Other nations’ currencies have the opposite problem. India’s rupee fell to a record low against the dollar. The Polish zloty and Hungarian forint had their biggest weekly declines. Mexico bought $13.1 billion of pesos to keep the currency from falling further; it has had its worst decline since the country’s “tequila crisis” of 1994, when the United States put together a rescue package.
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The falling currencies are a sign that investors are losing confidence in those countries, and it makes their imports more expensive.

The South Korean government has injected $130 billion into the country’s banks, but that failed this week to stabilize markets or prop up the country’s currency. Stocks have fallen about 35 percent this month, and the won continues to be the worst-performing major currency in the world, down about 35 percent against the dollar this year.

Entwined global economy

Much of the decline in the won and in Korean shares has been triggered by foreign investors pulling their money out of the country’s stock market. Foreign ownership of Korean stocks has fallen to less than 30 percent after peaking at about 42 percent four years ago, according to the Yonhap News Agency.

The deceleration of the world economy has also brought the summertime spike in commodity prices to a sudden end, an illustration of how entwined the global economy is. A credit squeeze can lead to a drop in U.S. spending, which can curb demand for Chinese exports, which can curtail demand for commodities.

Freeport-McMoRan Copper & Gold, whose exports go into everything from residential and commercial construction to electronics to automobiles, earlier this week slashed its 2008 earnings forecast to $6.15 per share from $8.50 per share because of plummeting copper prices. They have dropped more than 50 percent since June, mostly because of curtailed demand from China, the largest consumer of copper.

‘China is the gorilla’

Freeport doesn’t export directly to China, but China consumes more than one-quarter of the world’s copper supply, and a slowdown there has dampened world prices.

“When you look at worldwide supply and demand, China is the gorilla,” said Charles Bradford, metals analyst at Soleil Securities. “Near term, it looks like there is no bottom to the [metals] markets.”

China has also trimmed the importation of other materials that have fueled its spectacular run of growth. Bradford noted that ocean freight rates for iron ore from Brazil to China are down to $12 per ton today from about $108 last May.

Brazil illustrates how indiscriminate the financial crisis has been in claiming victims. Unlike many nations, Brazil’s economy is relatively balanced, and its foreign borrowings have been relatively modest. Yet the country has still been squeezed by recent events. On Thursday, it eliminated its tax on foreign investments to remove an obstacle to capital inflows and bolster its currency, which has dropped 17.5 percent against the dollar this month.

But if emerging economies are hoping for assistance, they might have to wait while industrialized countries wrestle with their own problems.

In Europe, investors were starting to digest the reality of the economic slowdown. The news that Britain is on the brink of recession contributed to a 5 percent drop on the London stock market. The pound dropped to $1.58, the first time it has dipped below $1.60 in five years.

“This figure is worse than we expected, with the slowdown spreading right across the economy,” said Richard Lambert, director general of the Confederation of British Industry. Manufacturing, construction and retail were all hit.

“This is the day the recession became real,” said David Cameron, the leader of the opposition Conservative Party. “We will get through this, but we need change to support small businesses; we need change to bring a more balanced economy.”

Prime Minister Gordon Brown said he wanted the help of other countries. “This is a global financial recession, and we’re fighting it every way we know how, working with other countries, trying to get the banks moving here in Britain,” he said.

Post correspondents Mary Jordan in London and Rama Lakshmi in Mumbai and staff writers Cecilia Kang and Kendra Marr in Washington contributed to this report. Blaine Harden reported from Tokyo.

By Steven Mufson and Blaine Harden
updated 5:20 a.m. ET Oct. 25, 2008

Source: msnbc

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