Persistent fears about the world economy battered global stocks again on Monday and drove investors towards safer assets, despite expectations of more interest cuts from the Federal Reserve to bolster growth.
Equity markets in Europe and Asia fell sharply with Japan's Nikkei dropping nearly four per cent on worries that the US economy was already dragging Japan's down into recession.
The pan-European FTSEurofirst 300 was down 1.3 per cent, taking January's losses alone to near 13 per cent.
"People remain pretty nervous. We haven't seen the full extent of the fall out of sub-prime," said Jan Smedts, deputy head of equities for Dexia Group, referring to losses and turmoil in the US mortgage sector.
Monday's losses on equity markets came despite efforts last week by US authorities to stop that country's economic downturn.
It included an emergency 75 basis point Fed cut, a $150 billion fiscal stimulus plan from the White House and early discussions on how to bail out insurers whose underwriting of debt may yet trigger a new wave of losses.
The Fed is also expected to cut interest rates again this week with interest rate futures showing the market betting on another 25 or 50 basis points in cuts, possibly taking rates as low as 3.0 per cent.
But many investors do not see these various moves having much immediate impact and remain in a strongly risk averse mood.
"In our view, the cuts already enacted, and the Fed's bias toward additional rate cuts, should help increase credit availability – the jury is still out, however, as to whether this will happen fast enough," investment house BlackRock said in a note late last week on market volatility.
The dollar fell 0.1 per cent to JPY106.54, while the euro was flat at JPY156.68. The single currency was up 0.2 per cent against the dollar at $1.4703.
Currency investors have been using stocks as a guide for how much risk to take, favouring risky carry trades – in which the low-yielding yen is used as a source of cheap funds to buy higher-yielding currencies – whenever equities rally and reversing those trades when they fall.
Euro zone government bonds opened generally higher as the economic worries boosted demand for lower-risk debt.
"It's stocks down, bonds up again," said a trader in London. (Reuters)
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