Turmoil in Global Markets: Fed Under Pressure to Act

Asian stocks markets are stabilizing after a day of dramatic plunges Tuesday as futures point to a measure of calm returning to Wall Street following the Dow’s sixth worst decline in the last 112 years.

Inside New York Stock Exchange: The Federal Reserve gathers on Tuesday under growing pressure to take some type of action to stem a financial market meltdown linked to fears of a new U.S. recession. Photo: Francis Liu/Flickr

An extraordinarily tumultuous trading day in Asia extended into Europe on Tuesday, while gold prices hit new highs and the dollar fell, dashing hopes that the global stock market sell-off that has flattened investors over the last two weeks would lose steam.

South Korea’s Kospi was off 3.6 percent at 1,801.35 after plummeting nearly 10 percent in the morning. Hong Kong’s Hang Seng, which fell as much as 7 percent, was down 2.9 percent at 19,890.85 and Japan’s Nikkei 225 stock average pulled back to a fall of 1.7 percent.

“When you get declines of this sort, it is technical factors and emotion that drive markets — the fundamentals are largely irrelevant,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore, referring to Wall Street’s plunge on Monday.

He characterized sentiment in Asia as “weary resignation” rather than outright panic, but he said that the markets in general had been caught in a “negative feedback loop” — where declining markets fuel worries about the economic fallout of the turmoil, which in turn undermines sentiment further.

Australia’s S&P/ASX 200 index moved into positive territory – up 1.2 percent at 4,034.80 – and mainland China’s key indexes eked out modest gains.

European stocks rallied at the opening but quickly fizzled. Just before mid-day, the Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 4 percent, while the FTSE 100 index in London slid 3.6 percent. The declines in Europe were led by energy companies like Royal Dutch Shell and industrial giants like Siemens, businesses that stand to suffer in an economic downturn.

“It’s still very hard to predict how the U.S. market will do,” said Jackson Wong, vice president of Tanrich Securities in Hong Kong. “When the dust settles, if the situation doesn’t get worse in the U.S. or Europe, the situation will rebound. But the U.S. has to stabilize.”

The big moves, which added to sharp losses in the past few days, came after the Dow Jones industrials fell 634.76 points on Monday. It was Wall Street’s first day of trading after Standard & Poor’s downgrade of the U.S. credit rating – which jolted the global financial system and reinforced anxiety that the U.S. economic recovery is stalling.

Futures suggested U.S. stocks might eke out slight gains Tuesday. Dow futures were up 6 points, or 0.1 percent, at 10,730 and broader S&P 500 futures added 1 point, or 0.1 percent, to 1,112.30.

The fear among investors has reached epidemic proportions, with the sell-off erasing $8.1 trillion — or 14.8 percent of market capitalization — from global stock markets since July 24.

Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected. Intensifying concerns were reports showing that the manufacturing and services industries barely grew in July, although job growth was better than economists expected last month.

Investors are also worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe’s 21-month-old debt crisis.

The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and in even higher borrowing costs for the two countries.

The European Central Bank stepped in Monday and bought billions of euros worth of their bonds. The move helped to lower yields on Spanish and Italian bonds, at least temporarily. U.S. crude oil futures for September delivery fell 2.1 percent to $79.59 a barrel.

The dollar declined against other major currencies. The euro rose to $1.4226 from $1.4179 late Monday in New York, while the British pound rose to $1.6346 from $1.6318. The dollar fell to 77.04 yen from 77.76 yen and to 0.7418 Swiss francs from 0.7550 francs.

While most analysts expect the Federal Reserve to not make any major changes in policy at its meeting on Tuesday, some wonder whether market disruptions of recent sessions warrant some kind of central bank intervention. The Fed will deliver its policy statement around 2:15 pm (1915 GMT).

“If the Fed does nothing, it could prove to be a disappointment at this point,” said JP Morgan analysts on a conference call to discuss the S&P downgrade. Some economists argue the Fed is close to out of bullets. Interest rates are effectively zero and the Fed’s balance sheet stands at a record $2.9 trillion after an unprecedented program of unconventional monetary easing.

Still, there are a few things the Fed could do to reassure markets, including to suggest it will revise down its growth forecasts — the first signal that it is leaning toward further policy accommodation. [via Huffpost, The New York Times and Reuters]

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