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Wall Street slides despite Fed's interest rate cuts

Latest update : 2008-01-22

European markets recovered from a sharp opening dip on Tuesday, after bad losses in Asia. The Federal Reserve cut its key interest rate, and after an opening dip Wall Street appeared headed for recovery too.

Stock markets faced another turbulent day Tuesday, as Wall Street and European markets dipped sharply on opening after a terrible day on the Asian markets. The dips came despite a decision by the US Fed to cut its main interest rates, though both US and European stocks later headed toward recovery.
 
In Asia, losses were so bad that Bombay and Seoul momentarily suspended trading, while Shanghai closed the day down 7.22%.
 
Wall Street initially followed the downward trend on Tuesday. At 15h30 GMT, the Dow Jones dropped 3.45%, but had largely recovered by midday. The dip came despite the decision of the Federal Reserve, the US central bank, to slash its main interest rates by 0.75 percentage points, to 3.50%.
 
The move by the US central bank follows a day of sharp losses in Asia on worries a deteriorating US economy would drag other regions down with it. Shanghai’s trading was down by 7.22% by the time it closed at 4.559,75 points. This spectacular slump suggests that, even if the Chinese economy is doing well, growth remains very fragile, and dependent on its American customers, says Sebastien Le Belzic, FRANCE 24’s correspondent in Beijing.
 
In Tokyo, the Nikkei index also closed in the red, closing at its lowest levels in two years with a drop of 5.65%. The Bombay stock exchange, just like the one in Seoul, also had to suspend trading Tuesday after taking a 9.75% plunge at opening.
 
The suspension lasted an hour. So as to avoid the Black Monday scenario, “investors sold massively under the threat of a recession in the States,” says Philippe Levasseur, FRANCE 24's correspondent in Bombay.
 
But the snowball effect doesn’t seem to have been as strong as originally feared. While European markets dipped sharply when they opened, they rebounded by the end of trading, with London's FTSE up 2.9% and Paris's CAC-40 index up 2%. Frankfurt's DAX was slightly down, by 0.31%.
 
The Asian drop is being blamed on the disappointment caused by the bailout plan announced by US President George W. Bush to prevent an imminent recession.
Fear of a US recession is at the root of this instability. “Certainly, Bush’s speech last week did nothing to reassure investors, but that’s not the only cause of this financial crisis," says Baptiste Fallevoz,  an economic specialist at FRANCE 24. “The slide dates several months. The CAC 40 has dropped more than 20 percent since June 2007.”
 
Luxembourg’s  finance minister, Jean-Claude Juncker, president of Eurogroup, acknowledged as much on Monday. “The situation in the United States continues to deteriorate. During the last few months we have not considered the possibility of a US recession, but today we can no longer ignore that possibility.”
 
"There are in fact reasons to be alarmist,” confirms Emmanuel Le Chypre. “The scenario of a crash is possible, but it’s not the worst thing that can happen,” he adds. “The real threat is an economic crisis that would block the financial system further. The banks would then be incapable of distributing credits and all the Western economies would be affected.”
 
Last week, Wall Street slumped for four sessions back-to-back. The exchange lost 4.02% over the week, prompting the American president to intervene. Bush's plan was based on tax cuts representing 1% of GDP, or around 140 billion dollars.
 
But the US president did not manage to reassure investors, who deem an American recession as more and more likely.
 
The financial situation is “serious”, according to IMF director Dominique Strauss-Kahn. “All the countries of the developed world are suffering from the slowdown of growth in the United States.”
 
The worrying situation in the world’s financial markets is a consequence of growing pessimism among economists, says FRANCE 24's Stéphanie Antoine. “Even the most optimistic economists are starting to admit that they fear a US recession, and this pessimist camp is now in the majority.”
 
A point of view shared by Susan George, former vice-president of ATTAC (Citizen’s Coalition for Excise Taxes on Cross-Border Currency Transactions), who said on FRANCE 24’s Face Off programme: “I think it’s a real recession and I think it’s going to spread over the whole world.”

Date created : 2008-01-22

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