World markets tumble on recession fears

World stock markets took a beating on Monday after a report showed US companies stopped hiring in August, reviving fears that the world's largest economy is heading back into recession.

The lack of hiring in the US last month surprised economists, who were expecting about 93,000 jobs to be added. Previously reported hiring figures for June and July were revised lower. The unemployment rate held steady at 9.1 per cent — it has been above 9 per cent in all but two months since May 2009.

The jobs crisis has led President Barack Obama to schedule a major speech Thursday night to propose steps to stimulate hiring.

Traders waited for signs that the US Federal Reserve might take action at its September meeting to support the economy — perhaps a third round of bond purchases, dubbed quantitative easing III or QE3, analysts said.

"Right now the possibility has increased," said Linus Yip, a strategist at First Shanghai Securities in Hong Kong. "I think they have to do something. The markets are expecting QE3."

Amid the uncertainty, traders pulled out of any risky investments — such as stocks, particularly financial ones, the euro and emerging market currencies — to pile into safe havens: US Treasuries, the dollar, the Japanese yen and gold.

European shares slumped in early trading. Britain's FTSE 100 dropped 2.9 per cent to 5,136.36. Germany's DAX fell 4.7 per cent to 5,280.13, and France's CAC-40 tumbled 4.6 per cent to 3,003.64.

Markets in the US were closed for the Labor Day holiday.

Banking stocks were among the hardest hit after the US government on Friday sued 17 financial firms for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.

Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.

Renewed jitters over the eurozone debt crisis also contributed to the slump in financial stocks amid concerns they would need to raise new capital. Deutsche bank was down 9.4 per cent in Frankfurt while Societe Generale in Paris shed 9 per cent.

An international debt inspectors' review of Greece's finances was interrupted on Friday amid disagreements over the country's deficit figures. The review will be resumed in about 10 days and must be completed in order for the country to receive its bailout loans at the end of the month.

Signs that the Italian government's commitment to its austerity program is wavering have also shaken investors. Prime Minister Silvio Berlusconi's government has backtracked on some deficit-cutting measures, prompting EU economic officials to urge it to stick to its promised plan.

The economic indicators, meanwhile, were mostly downbeat. Although retail sales in the eurozone rose unexpectedly in July, a survey of the services sector showed a slowdown across the continent for the fifth consecutive month.

The purchasing managers' index for the eurozone showed the services sector was still growing — unlike the manufacturing sector — but only barely. That will add pressure on the European Central Bank to keep interest rates on hold when it meets this week.

"Indeed, the latest data and surveys suggest that the ECB's eventual next move could actually be to trim interest rates, although it is likely to need sustained eurozone economic weakness and possibly even GDP contraction to get the ECB to perform a U-turn on interest rates," said Howard Archer, economist at IHS Global Insight.

In Asia, indexes closed sharply lower. Japan's Nikkei 225 stock average sank 1.9 per cent to close at 8,784.46, with sentiment also undermined by the persistent strength of the yen, which hurts exporters.

Australia's S&P/ASX 200 fell 2.4 per cent to 4,141.9, and South Korea's Kospi slid 4.4 per cent to 1,785.83. Hong Kong's Hang Seng slid 3 per cent to 19,616.4. Benchmarks in Singapore, Taiwan, New Zealand and the Philippines also were down.

Mainland Chinese investors worried about the economic outlook dumped shares, dragging Shanghai's benchmark Composite Index down 2 per cent to 2,478.74, its lowest close in 13 months. The Shenzhen Composite Index lost 2.4 per cent to 1,097.07.

Investors seeking a relatively stable store of value during times of economic turbulence in financial markets have been scooping up gold, sending its price up 50 per cent over the past year.

In currencies, the euro weakened to $1.4078 from $1.4187 in New York late Friday. The dollar was roughly flat at 76.92 yen. Last month, the dollar fell under 76 yen, which was a new post-World War II high for the Japanese currency.

Benchmark oil for October delivery was down $1.85 to $84.60 a barrel in electronic trading on the New York Mercantile Exchange. Crude fell $2.48 to settle at $86.45 on Friday.

In London, Brent crude for October delivery was down $1.66 at $110.67 on the ICE Futures exchange.

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