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While you were sleeping: Economic clouds darken

While you were sleeping: Economic clouds darken

(BusinessDesk) August 19 - Stocks in Europe and on Wall Street plunged on increasing concern about the darkening fiscal and economic outlook on both sides of the Atlantic.

Morgan Stanley slashed its global growth forecast for this year and the next, warning that the U.S. and the euro area were “hovering dangerously close to recession.” Goldman Sachs followed with a downgrade of its economic expectations.

Reports today highlighted recent signs that the world’s largest economy is faltering, as initial jobless claims unexpectedly increased and Philadelphia-area manufacturing shrank by the most in more than two years.

In late trading, the Dow Jones industrial average shed 3.92%, the Standard & Poor's 500 Index plunged 4.73% while the Nasdaq Composite Index sank 5.28%. In Europe, too, the Stoxx Europe 600 Index ended the day with a 4.8% drop.

"Europe is dealing with an escalating fiscal crisis," Robert Van Batenburg, head of equity research at Louis Capital in New York, told Reuters.

"In the United States the momentum is slip-sliding. You've got a lot of corporations that also came out with very worrisome comments that by the end of the quarter things really started to slow down."

Underpinning worry how the combined fiscal and economic troubles are affecting financial institutions was a report by the Wall Street Journal that the Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures.

Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., the Wall Street Journal reported, citing a senior executive at a major European bank who has participated in the talks.

Bank shares in Europe and in the U.S. were among the leading decliners. Both Dexia SA and Societe Generale SA plunged more than 12%, while Citigroup Inc shed more than 7% and Morgan Stanley sank more than 6%.

The so-called investors’ fear gauge, the VIX, soared 33%.

“You can see people getting out of the market, and there’s a lot of hedging going on,” Dan Deming, a VIX options trader at Stutland Equities LLC, told Bloomberg News. “There’s continued concern about European banks and that we might be in for a credit squeeze.”

The economic worry bolstered concern that demand for oil will slow, while further boosting the appeal of the perceived safety of gold.

Crude for September delivery on the New York Mercantile Exchange shed as much as US$1.57 to US$86.01 a barrel. Gold futures climbed to a record US$1,829.70 an ounce.

The Dollar Index, which measures the U.S. currency against a basket of its major counterparts, advanced 0.66%.


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