Despite Rate Cut, U.S. Stocks Drop Sharply

European, Asian Markets Rally

By Howard Schneider, ariana Eunjung Cha and Kevin Sullivan

Washington Post Staff Writers

Wednesday, January 23, 2008; 10:47 AM

 

 

U.S. stocks dropped sharply this morning as corporate profits and fear that the economy is heading towards recession undermined the effect of Tuesday's Federal Reserve interest rate cut.

The Dow Jones industrial average dropped more than 200 points, or roughly two percent, on the opening bell, while the Nasdaq suffered an even larger proportionate loss. With corporate reports from Apple and Motorola both disappointing investors, the tech-heavy index had lost more than 55 points, roughly 2.5 percent of its value. The S&P 500 was down nearly 2 percent.

All three exchanges regained ground as trading continued in a volatile environment.

"There's a lot of emotion, there's a lot of misinformation," said Andrew Brooks, head of stock trading for T.Rowe Price. "The markets are schizophrenic. You're seeing the markets bounce around in a big way."

The market losses today come despite efforts by the Federal Reserve and the Bush administration to bolster the economy with a variety of tools -- from lower interest rates to promises of tens of billions of dollars in tax benefits meant to support business and consumer spending.

The Fed's unexpected, three-fourths of a percentage point interest rate reduction stemmed Wall Street losses on Tuesday, and prompted a rebound in Asia. After a turbulent day of trading, Asian stocks ended the day substantially higher, with Hong Kong's Hang Seng index adding 11 percent, its steepest increase in a decade. Japan's Nikkei added 2 percent. In India, where stocks plunged more than 10 percent early Tuesday and trading was halted, shares soared 7.4 percent on Wednesday.

But the Asian euphoria didn't travel too far west. European shares had jumped Tuesday following the Fed's decision, but comments from the head of the European Central Bank helped push major indexes back down on Wednesday.

In a speech to the European Parliament, the head of the European Central Bank said that the ECB would not follow the Fed with its own interest rate reduction, but would focus on ensuring inflation remained under control. Lower interest rates encourage spending, which can help push prices higher.

"Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility," ECB President Jean-Claude Trichet said, according to the Bloomberg wire service.

London's FTSE 100 index was off by around 3 percent at one point, while Germany's DAX 30 was down by more than 5 percent -- losses that were moderating as the European trading day neared its end.

Political leaders in Europe on Tuesday had sought to calm sell-off fears by assuring Europeans that economic problems were in the United States, not their countries.

French Finance Minister Christine Lagarde counseled against "losing one's head."

"We are not in the same situation as the U.S.A.," she said on French radio. "American households can be 100 percent in debt, with floating interest rates. It is not the case in Europe; it is not the case in France. Unemployment in the U.S.A. is increasing, in France it is decreasing. The U.S. economic growth has slowed; French growth is continuing up."

Germany's deputy finance minister, Thomas Mirow, offered a similar view in Brussels. "The crisis took its first steps in the U.S.," he said. "The U.S. is coping with it, and it's their responsibility."

Major European stock markets had fallen yesterday morning on continuing fears of a U.S. recession and spillover from the subprime mortgage crisis. They bounced back after the Fed's interest rate announcement, which was made early in the afternoon European time.

London's FTSE 100 index rose 2.9 percent yesterday after falling 5.5 percent fall on Monday. France's CAC-40 index rose 2.1 percent after falling almost 7 percent Monday. Frankfurt's DAX stock index, one of Europe's few losers yesterday, was down 0.3 percent after losing 7 percent the day before.

"This may not be the silver bullet that kills off the threat of recession, but it's a move in the right direction," said Henk Potts, a strategist at Barclays Wealth in London, referring to the U.S. rate cut.

French President Nicolas Sarkozy said he would meet with his British and German counterparts next week in London to discuss proposals to make European financial systems more transparent and less susceptible to speculation.

Mervyn A. King, head of the Bank of England, which operates independently from the British government, said the credit squeeze and increasing inflation could spell trouble for Britain. "To put it bluntly, this year we are probably facing a period of above target inflation and a marked slowing in growth," King told a group of business leaders in Bristol, England, the Associated Press reported.

The subprime-mortgage crisis in the United States has already caused problems in Europe. German bank WestLB on Monday said it would post a 2007 loss of $1.45 billion, stemming mostly from exposure to U.S. mortgages, and said it expected $1.5 billion more in write-downs. In Switzerland, UBS this month said it had taken charges of $14.5 billion, much of which was related to subprime mortgages in the United States.

In Russia, where stocks fell modestly yesterday after steep drops in previous days, government officials said the country would be able to ride what one Central Bank official called "the crisis in the West."

Jean-Claude Juncker, the prime minister of Luxembourg, said in Brussels that "deficiencies" in the U.S. economy, about which Europeans had "warned repeatedly," were now "taking bitter revenge" against the U.S. economy.

Mike Lenhoff, chief strategist for Brewin Dolphin Securities in London, said in an interview that criticism of the United States was a familiar European habit.

"I think the European mentality is that Americans are a bunch of big spenders who get themselves into trouble and cause problems for everybody," said Lenhoff, a Canadian who works for a British company. "Certainly the root of this problem was American. And I can understand why there is hostility. But I think it is misplaced. America is doing all it can do right now."

Michael Fallon, a Conservative Party member of the British Parliament and a member of its Treasury Committee, said, "What we are seeing is huge uncertainty in the market." He said Britain could not match the Fed's rate cuts or President Bush's stimulus package, announced Friday, because Britain could not afford it. "We're much more boxed in," he said.

In Latin America, Brazil's benchmark Bovespa index was up 4.45 percent yesterday, rebounding from Monday's four-month low. Argentina's Merval index in Buenos Aires rose 3.55 percent. The gains in Brazil were also fueled by state-run Petrobras's announcement of the discovery of a natural-gas field.

The Brazilian and Argentine economies had been hurt in recent weeks, as many investors sold off emerging-market securities. Argentine economist Federico Thomsen said the two economies, aided by high commodity prices, were better prepared to deal with a slumping U.S. economy than they had been, but that it was too early to discount off a trickle-down effect from Wall Street.

The Mexican Bolsa, Latin America's second-largest stock exchange, finished up 6.46 percent yesterday, before which it had been down 14 percent for the year.

In 2001, when the U.S. economy and stock markets slumped, so did the Mexican stock market. But "the Mexican economy has a much more solid footing now," said Eduardo Garc¿a, a Mexico City analyst who runs the Sentido Com¿n business Web site.

Garc¿a said inflation was under control in Mexico, interest rates were at historic lows and there was abundant credit available for businesses. High oil prices are also helping stabilize Mexico's economy. Still, Garc¿a said, "everybody's worried."

Some economists had argued for months that Asian countries were largely insulated from U.S. problems because of strong growth in China and India. But recently, companies and financial institutions in those countries have announced that they too have significant exposure to subprime mortgage securities that have collapsed in the United States.

Kai Jiang, chief executive of China Fund, said "a lot of Chinese banks, any banks to some degree, are exposed to the subprime crisis." Still, he said, he remains optimistic about the health of the global economy.

Less than a month into the new year, several of Asia's largest stock markets are already down by double-digits.

In Japan, the benchmark Nikkei 225 index dropped 5.65 percent yesterday after losing 3.86 percent on Monday. It is now down nearly 18 percent this year.

In Hong Kong, the Hang Seng index was down 8.65 percent yesterday, after falling 5.49 percent the day before. The Hang Seng is off 19 percent this year and down 30 percent from late October.

The selling affected some of Asia's largest exporters, which depend on the U.S. market. Samsung Electronics of South Korea, for example, slid 5 percent. Australian mining stock BHP Billiton was down 7 percent.

PetroChina, which a few months ago was hailed as the first company to pass the $1 trillion in stock market value, fell 12 percent yesterday . Shares now are down by half since their high on Nov. 1.

Governments throughout Asia explained their exposure to U.S. problems.

"The U.S. is among China's largest exporting destinations, so if U.S. demand weakens, the impact on China would be very serious," said Zhang Tao, deputy director-general of the Chinese central bank's international department.

In India, Finance Minister P. Chidambaram urged investors to remain calm. "There is no reason to allow the worries of the Western world to overwhelm us," he said. "Our economy is very different from the economies of developed countries, which are facing some stress. Our economy is very strong -- market sentiment should be a positive sentiment."

Cha reported from Shanghai and Sullivan reported from London. Correspondents Craig Whitlock in Berlin, Molly Moore in Paris, Peter Finn in Moscow, Manuel Roig-Franzia in Mexico City and Rama Lakshmi in New Delhi, Staff Writer Tomoeh Murakami Tse and special correspondent Brian Byrnes in Buenos Aires, contributed to this report.