Share prices tumbled to their lowest in nearly a year on Monday on worries the US – the world’s biggest economy – could slip into recession again – with Washington’s fiscal credibility under attack.
The sell off of stocks is investors sending a message to politicians worldwide that they are not doing enough to address the problems threatening the global economy.
Ironically they bought US government bonds — the very asset that was downgraded by the Standard &
Poor’s credit agency late on Friday.
Those bonds are considered to be a better investment than shares because of their liquidity and the perception of the high quality of US credit.
The European Central Bank’s efforts on Monday to stop the euro zone debt crisis spreading by buying Spanish and Italian government bonds had only a limited short term effect on share prices, though the cost of borrowing for those countries did fall.
Louise Cooper, of BGC Brokerage in London, explained: “The underlying fundamentals are really pretty dire. If you look at Italy, it you look at Spain, they are heavily indebted. What can they do to pay down that debt? Well they need to grow, but that is quite difficult when they are heavily indebted, so it’s a Catch-22 situation of too much debt and not enough growth and you can’t work out either one.’‘
Senior trader Will Hedden with IG Index in London does not see an end in sight soon: “We’ve definitely got a long way to go yet, we’ve still got problems in the euro zone. The US issues definitely aren’t over, and they’re obviously coming up to an election, so that’s going to play on (pull down) their markets as well.”
The main Moscow share index fell nearly eight percent as Russia’s economy is heavily dependent on energy sales and oil prices slumped on concern over a slowdown in economic growth
Gold hit a new record above $1,700 an ounce as investors sought a safe place for their money.
The dollar dropped against the Swiss franc and yen, while the euro fell more than one percent against the dollar.