Markets dive amid global economic pessimism

In Asia, the Nikkei 225 lost 2 per cent and the Shanghai Composite was down 2.8 per cent. Most commodities, gold included, were down significantly. Copper prices, which are often viewed as a proxy for global economic growth, lost 4.6 per cent, taking them to a year low.

The market was gyrating so furiously that it produced some extraordinary spectacles. For instance, Germany’s 5-year credit default swaps, a measure of the cost of insuring sovereign bonds against default, hit a record high even as German bonds, considered Europe’s safest debt, dropped to a record low yield of 1.7 per cent.

In Europe, the banks and mining companies bore the brunt of the selloff. Every bank and miner of any size opening lower on Thursday. French banking giant BNP Paribas lost more than 5 per cent, taking the one-week loss to 24 per cent and the 6-month loss to 56 per cent. Italy’s UniCredit shed 3 per cent, for a six-month loss of 64 per cent.

Investors fear that the European banks lack the capital to absorb the twin threats of a slowing economy and a Greek default. In an interview with France’s Le Figaro, Michel Barnier, the European Union’s financial services commissioner, that he can’t rule out the possibility that some European banks will need bailouts.

Among the mining companies, Xstrata, the Anglo-Swiss diversified miner that owns Canada’s Falconbridge, lost 8 per cent as investors took the view that global growth will get crunched as the debt and banking crises intensify.

In Europe, the factor that seemed to be propelling the markets downward was particularly bleak data from the newest purchasing managers’ index, or PMI. The index, which is widely followed, declined to 49.2 from 50.7 against a consensus of 49.8, leaving it at the lowest level since mid-2009, when the financial crisis was still in full swing. “The current index level indicates that the euro zone recovery has ground to a complete halt,” ING Bank’s Martin van Vliet said.

The manufacturing and services indexes also fell, adding to the doubts about the sustainability of the global recovery that seemed to be in place early this year.

In a note, RBC Dominion Securities said the PMI slowdown may force the European Central Bank to reconsider its current no-easing policy. RBC said that “with a euro area recession now a distinct possibility, that position will come under renewed pressure.”

The European markets were bound to fall Thursday if only because the Fed’s “Operation Twist” damaged market confidence, even though its immediate goal – flattening the yield curve by pushing down long-term interest rates – worked. In announcing the US$400-billion operation, the Fed signalled “significant downside risks” to the American economy. The warning triggered a retreat from growth-focused investments.

The global market selloff is expected to make companies reconsider financing plans. On Thursday, China’s Sany Heavy Industry, a maker of construction machinery, postponed its $3.3-billion (U.S.) offering on the Hong Kong market, citing weak market conditions. Hong Kong’s Hang Seng Index has fallen 22 per cent this year.