Fear grips markets; gold zooms above $1700
Singapore, August 8, 2011
Fear gripped Asian markets on Monday as the fallout from the historic downgrade of the US debt rating drowned out pledges of assistance from Europe's central bank and soothing words from the Group of Seven.
Facing the unknown investors ran to gold, which hit a new record atop $1,700 an ounce, while share markets were again coloured red. Seoul's main share index tumbled 7 percent and S&P 500 futures sank 2.7 percent.
Indian stocks fell over three percent in morning trade, tracking plunging Asian markets.
The benchmark 30-share Sensex on the Bombay Stock Exchange was down 533.67 points or 3.08 percent to 16,772.2 within an hour of opening -- the lowest level since June last year.
The grim mood was caught by Nobel prize-winning economist Nouriel Roubini writing in the Financial times. "The misguided decision by Standard & Poor's to downgrade the US at a time of such severe market turmoil and economic weakness only increases the chances of a double dip and even larger fiscal deficits," he warned.
"So can we avoid another severe recession? It might simply be mission impossible."
The rout was all the more alarming as it came despite an assurance from G7 finance ministers that they were "ready to take action to ensure stability and liquidity in markets".
And investors paid only brief heed to a surprise statement from the European Central Bank (ECB) that it would "actively implement" its controversial bond-buying programme to fight the euro zone's debt crisis.
That had stirred hopes it would buy Spanish and Italian government bonds to short-circuit financial market contagion.
It also whetted investor appetite for what the Federal Reserve might say at its policy meeting on Tuesday, fuelling speculation it might soon have to consider a third round of quantitative easing to resuscitate the world's richest economy.
"It does seem that policymakers globally are swinging into action," said Shane Oliver, head of investment strategy at AMP Capital Investors, one of Australia's biggest fund managers.
He said the prospect of the ECB buying Italian and Spanish government bonds was particularly welcome. "A move to now start buying Italian bonds could be very positive in helping to calm fears about a further escalation of European debt problems," said Oliver. "Speculators will now have to think twice about selling or shorting Italian and Spanish bonds knowing the ECB will be acting against them."
It was enough to send the euro up half a cent in Asian trading on Monday to stand at $1.4350, although traders have been disappointed so often by EU leaders that they were reluctant to take it any further. - Reuters