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Tue 9 Aug 2011 09:27 PM

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Global economy stumbles deeper into crisis

Stock markets slump further on Tuesday as investors lose confidence in debt issues of US, Europe

Global economy stumbles deeper into crisis
stock market

The global
economy stumbled deeper into crisis as stock markets slumped further on
Tuesday, with investors losing confidence that the United States and
Europe can rein in their debt burdens quickly and avert a double-dip
recession.

Even as Asian equity markets
pulled back from another day of staggering losses as they closed,
European shares tumbled for an eighth session running, with news of an
unexpected drop in British factory output in June highlighting the
weakness of the economy.

The
worsening market trauma has piled pressure on the US Federal Reserve
to announce fresh measures of support for the US economy at a regular
policy meeting on Tuesday, but analysts said its options are limited.

"You
have got to a situation of capitulation and panic selling, and these
things will keep running until we get some sort of policy response,"
said Peter Hickson, managing director of global commodity research at
UBS.

"Even policy response these
days seems to be impotent in terms of the market sentiment at the
moment. The market is asking whether policymakers have many more bullets
to fire."

Investors fear that,
with confidence in the global economy's prospects evaporating, financial
markets will remain in a slump, feeding a vicious circle of pessimism.

As
of Monday, stock losses had wiped some $3.8 trillion from investor wealth globally in the recent rout as buyers
rushing for perceived safety in the Japanese yen, the Swiss franc and
gold, which hit another record high on Tuesday.

MSCI's
all-country world index was down 1.2 percent, and has now shed about 20
percent since peaking in May. The market rule of thumb is that a fall
of that magnitude constitutes a "bear market".

As
the flight from risk continued in Asia and Europe on Tuesday, there was
more bad news, this time from China, the stuttering global economy's
main engine room.

Official data
showed China's industrial output grew at a slower pace and its annual
inflation rate unexpectedly quickened to 6.5 percent in July.

The
inflation pressure puts the country's central bank in a bind as it
tries to keep prices in check without dragging down an economy that
already faces increasing threats from abroad.

It
may not be in a position to reprise its 2008 role of lifting the global
economy. When the Lehman Brothers bankruptcy triggered a worldwide
slump, China implemented a stimulus package that helped buffer its own
economy and buoy the world.

However, some analysts called on Beijing to act.

"It's
time for Beijing to announce to the whole world that it will try to
stimulate domestic demand again," said Tang Yunfei, an analyst with
Founder Securities in the Chinese capital.

Global
leaders have failed to reverse sliding markets since a blow was dealt
to investor confidence by Standard and Poor's downgrade of the US
sovereign credit rating last week.

The
downgrade heightened concerns that the twin-pronged crisis of a
worsening euro-zone debt problem and a faltering US economy raised the
risks of a double-dip recession.

The
European Central Bank (ECB) swept into the bond market to buy Italian
and Spanish debt and sling a safety net under the euro zone's third- and
fourth-largest economies on Monday. But bickering has persisted in
Europe over a longer-term rescue plan.

In
the United States, President Barack Obama called on Monday for urgent
action on the U.S. budget deficit, but his proposal on taxes was
promptly rebuffed by Republicans.

A
pledge by G7 finance ministers and central banks on Sunday to provide
extra cash if markets seize up has also provided little solace as their
credibility wore thin.

"Four
years into the financial crisis, it is becoming increasingly clear that
the biggest deficit is not in credit, but credibility," Harvard
University economist Kenneth Rogoff wrote in the Financial Times.

"Markets
can adjust to a downgrade of global growth, but they cannot cope with a
spiralling loss of confidence in leadership and a growing sense that
policymakers are disconnected from reality."

Major
indexes in Asia slumped in early trade following a drop of more than 6
percent on Wall Street on Monday, and although some staged a sharp
rebound, Hong Kong shares recorded their biggest one-day decline since
the 2008 crisis.

European bourses
put in a short-lived attempted at gains at the open, but succumbed to
the bearish mood. The FTSEurofirst 300 index of top European shares lost
ground for the eighth session in a row, hitting a two-year low.

"The
speed and degree of deterioration in the situation is akin to what we
saw during the failure of Lehman Bros, through the dot.com burst ... and
during the 1982 recession," said Warren Hogan, chief economist at ANZ
Banking Corp in Australia.

"We are looking at markets pricing for some sort of financial crisis. I think we are at a critical period now."

Concerns mounted that Asia would inevitably feel the cold wind of the West's slowdown.

"This
is the first time in several years that all three major economic
regions are feeling economic distress at the same time," said Keith
Ducker, chief investment officer of Tora, a dark pool operator.

With
US stock index futures pointing to further steep losses for Wall
Street on Tuesday, attention focussed on a meeting due later of the
Federal Open Market Committee as a possible prop for the market, though
the Fed is expected to keep interest rates unchanged.

"Speculation
is growing that Chairman Ben Bernanke may do more to help restore
confidence with possibly another round of asset purchases," said
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets,
in Brussels.

On the political
front, Obama said on Monday he hoped the loss of the prized AAA credit
rating would add urgency to US budget cutting plans.

He
called for both tax hikes and cuts to welfare programmes as part of the
$1.5 trillion in deficit reduction that a special committee would
deliver in late November, but Republican House Speaker John Boehner once
again rejected the call, saying tax hikes were "simply the wrong
approach."

Obama also spoke with
the leaders of Italy and Spain, welcoming measures by their governments
to address the economic turmoil in Europe.

Traders
said the ECB was again seen buying Italian and Spanish debt on Tuesday
after it agreed on Sunday to broaden its bond-buying program for the
first time to halt an attack on the Mediterranean countries.. Italian
and Spanish yields declined sharply.

The
ECB move was seen as only a temporary solution, however, due to the
sheer size of Italy's bond market -- $1.6 trillion -- and there are
doubts in the market it can be sustained.

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Toby 9 years ago

Is there anything you and I can do about this? NO! So just keep helping your company find more customers and keep it growing and you will be OK. That's the only practical thing you can do to keep your salary coming.