Fears of recession spark further turmoil in markets
By David Usborne in New York
Published: 02 March 2007
Fresh anxiety erupted about the health of the world's
major economies yesterday after investors in stock
markets across Asia, Europe and the United States once
again staged significant retreats two days after
Tuesday's unexpected global equity sell-off.
In New York, the Dow Jones Industrial Average plunged
more than 200 points in the first minutes of trading,
seeding fears of a repeat of Tuesday's massacre that
saw a 416-point collapse on the index.
With slowdowns emerging, notably in the housing market
and car manufacturing in the United States, signs are
building that it economy may be at a pivot point, with
some observers worrying about decelerating expansion
and possibly a recession looming.
The fearful mood was exacerbated by comments from Alan
Greenspan, the influential former chairman of the US
Federal Reserve, about the possibility of the US
entering recession before year's end. He told a
conference in Tokyo yesterday: "By the end of the
year, there is the possibility but not the probability
of the US moving into recession." He has argued this
week that corporate profit margins appear to be
narrowing, indicating that a recent economic expansion
has reached a "mature phase".
Market watchers warned of several more bumpy days to
come, pointing to the renewed erosions in stock
markets globally yesterday. The Shanghai stock market
slippedan additional 2.9 per cent. The London FTSE
index closed down 55.5 points or 1.5 per cent. The Dow
later recouped most of its early losses as some more
encouraging economic data was released and closed down
34.29 points. But fears remain that there may be worse
to come. All the markets have fallen significantly
during the course of the week.
Senator Hillary Clinton, a candidate for the US
presidency, last night called events of recent days a
"real wake-up call" for the United States, saying it
was "increasingly losing control" of its economic
sovereignty because of the globalisation of economies
and policy-making, including in China.
"We are in a different environment," she said, noting
the $2.2 trillion (£1.1trillion) foreign debt held by
the US. "Obviously, the level of public debt that is
held by central banks and foreign government is a
problem and I don't want our government to ignore this
A degree of calm was restored to the New York market
after indicators were released showing
better-than-expected manufacturing numbers for the US.
The Institute for Supply Management's index of
manufacturing activity registered 52.3 for January,
stronger than the 50.0 reading analysts had expected.
By convention, a recession is considered to be in the
offing if that number falls below the 50-point mark.
The US Commerce Department revealed that seasonally
adjusted personal income in the US rose by 1.5 per
cent in January, which was also a better result than
had been anticipated.
Investors have been spooked by this week's gyrations
after enjoying 12 months of almost unbroken growth in
stocks. No one was more shocked than the new Chinese
investors who watched in dismay on Tuesday as the
Shanghai index tumbled almost 9 per cent.
US economists are contemplating a change in the
balance of power between world markets, where New York
can nowadays find itself hostage to foreign market
"It's kind of the tail wagging the dog," said Arthur
Hogan, chief market analyst at Jefferies & Co in New
York. "There's no stability in Asian markets, and no
stability in European markets. We're trading the
market as the rest of the globe is."
After the "Shanghai Sneeze", as some called it,
officials tried to soothe investors. There was a brief
claw-back on Wednesday in New York after Mr
Greenspan's successor at the Federal Reserve, Ben
Bernanke, said in congressional testimony that
"there's a reasonable possibility that we'll see some
strengthening of the economy sometime during the
middle of the year". He played down a report that
showed that a 2006 fourth-quarter expansion of the US
economy was slower than previously estimated.
There was no saying how the week would end for world
markets today. "The aftermath of Tuesday's major
sell-off will linger for the next couple of days,"
said Peter Cardillo, chief market economist at
brokerage house Avalon Partners. He added, however,
that "fear of recession is overblown".
That Mr Greenspan is still able to move world markets
even in retirement is certain to raise questions about
whether he would do better to keep his counsel.