Billions lost as fears of global recession hit world markets

New York—World markets buckled under a frenzied sell-off on Thursday as investors panicked the global economy was headed for another recession, one which policymakers may be ill-equipped to prevent.

From New York to Tokyo it was a brutal day for investors as countless billions of dollars were wiped off the value of companies globally.

The 30 firms that make up the Dow Jones industrial average alone lost $103 billion of their value—or around 3.5 percent—while major indexes in Europe, Asia and Latin America commonly suffered losses of around five percent.

The Dow lost 391 points to finish the day at 10,734, a level only seen once in the last year.

London’s FTSE-100 index closed down 4.7 percent. In Hong Kong, the Hang Seng closed down 4.9 percent to its lowest finish since July 2009.

On Friday, for the second straight day, investors in Asia dumped stocks as weak economic indicators from major nations intensified fears of a new global downturn.

But a joint call to action by the Group of 20 nations helped calm markets in Europe.

Oil prices stabilized near $81 a barrel after diving to a near seven-week low on Thursday. The dollar was down against the yen and the euro.

European stocks rose tentatively after a day of steep losses on Thursday. Britain’s FTSE 100 added 0.1 percent to 5,046.44.

Wall Street was set for a higher opening after the Group of 20 pledged a strong and coordinated response to the European debt crisis and weak economic growth in the United States and other countries.

Downturn in China

Asian shares were pulled down on Friday by a raft of bad economic news, including signs of a manufacturing downturn in China that could reduce its demand for commodities and industrial components from other nations.

Hong Kong’s Hang Seng fell 1.4 percent to 17,668.83 after losing nearly 5 percent the day before. Taiwan’s TAIEX dropped 3.6 percent to close at a two-year low of 7,046.22.

South Korean shares took a large hit, with the Kospi tumbling 5.7 percent to 1,697.44. Mainland China’s Shanghai Composite Index lost 0.4 percent to 2,433.16.

Japan’s market was closed for a holiday.

No decisive action

“I think the most important thing is Europe and America are both entering into recession at the same time, and the governments failed to take decisive action to stop the decline,” said Francis Lun, managing director of Lyncean Holdings Ltd. in Hong Kong.

Lun also blamed “political squabbling” in the United States, the world’s largest economy, that is preventing President Barack Obama from spending the money needed to create a jobs program with real impact.

The seeds for the turmoil appear to have been planted Wednesday, when the Federal Reserve warned an already tepid US recovery faces serious risks, even as the bank appears to be running low on policy remedies.

Political paralysis

“It’s the ever-increasing threat of another recession that is really spooking investors,” said analyst Simon Denham at Capital Spreads.

But concern about the fate of the US economy only heightened long-running fears that key pillars of the global economy are cracking under the strain of debt and slow growth.

As representatives from the world’s major economies gathered in Washington for a regular meeting of the G20 and the International Monetary Fund, there were increasing doubts that Europe can overcome political difference and decisively tackle its long-running debt crisis.

“Bad economic news from the United States and Europe, compounded by political paralysis and the risk of a serious policy mistake, continues to roil markets,” IHS chief economist Nariman Behravesh and IHS Global Insight economist Sara Johnson told clients.

‘In danger zone’

The heads of the World Bank and IMF warned that Europe and the US risked “suffocating” the global economy if they did not get control of their economies.

World Bank president Robert Zoellick called for action, warning: “The world is in a danger zone.”

The IMF’s Christine Lagarde said that risks to the global economy had increased, “but there is a way forward, if countries act now, act boldly, and act together.”

But across the globe on Thursday, investors voted with their feet, pumping money into perceived safe-haven assets, notably the dollar and US government debt.

Commodities shunned

Such was the scale of the fear that traders even shunned commodities, which have long been kept buoyant by growth in China and other emerging markets.

Sentiment was further damaged by escalating concern over the banking sector in Europe, linked to contagion from the eurozone debt crisis and downgrades by Moody’s on three top US banks—Bank of America, Wells Fargo and Citigroup.

“Equity markets have been bombarded by bad news after bad and this week looks to have been as bad as any so far,” added analyst Denham.

Harsh words

Meanwhile, Canada’s finance minister had harsh words for Europe. On Thursday, he warned of a second financial meltdown on the scale of 2008 if Europe did not take decisive action to recapitalize its banks and deal with the Greek debt crisis.

“There’s some justified frustration with respect to the lack of political decisiveness in Europe,” Finance Minister Jim Flaherty said. “The markets are reacting.”

Flaherty said Greece and other severely indebted nations must be made to follow through with austerity programs to bring down spending, and Europe must put up the billions of dollars that will be needed to ensure banks don’t fail.